Italy's Labor Pains

Berlusconi's reforms may backfire

Assassination. The Red Brigades. Nationwide strikes and antigovernment demonstrations. Europe in the bad old 1970s? No--it's the Italy of Silvio Berlusconi in the spring of 2002. The media mogul turned Prime Minister has plunged Italy into crisis by trying to run his country the same way he ran his business empire: by dictating change instead of negotiating to win it. A fierce backlash against his approach could stymie urgently needed labor and other economic reforms in Italy, sending a counterproductive signal across Europe. Escalating social strife could also stall growth in one of the Europe's largest economies and undermine Berlusconi's majority--Italy's first in 50 years.

Berlusconi's goal, changing labor laws that make it nearly impossible for Italy's employers to fire workers, is laudable. Spanish Prime Minister Jose Maria Aznar introduced similar changes peacefully in the 1990s, boosting labor flexibility and employment. Economists and industry leaders praise Berlusconi's goal but say his tactics were flawed.

Conflict erupted in November when the government announced a draft law that would make it easier to fire certain types of newly hired workers. But it turned tragic on Mar. 19, when Marco Biagi, a labor economist who was advising the government on upcoming reforms, was shot in the neck while bicycling home in Bologna. A new generation of Red Brigades terrorists claimed responsibility. On Mar. 23, at the behest of the country's largest and most militant labor union, CGIL, more than a million Italians from Trieste to Palermo streamed into Rome's Circo Massimo, the site of ancient chariot races, to protest the proposed changes to the 1970 legislation that essentially gives Italian workers lifetime job security. The peaceful demonstration, Italy's largest since a 1994 rally against Berlusconi's proposed pension reform, provoked outbursts by several senior officials including Reform Minister Umberto Bossi, who accused Italy's labor unions of links with terrorists. Outraged union leaders, who condemn Biagi's murder and say they have nothing to do with the Red Brigades, immediately canceled a planned return to the negotiating table and announced a nationwide strike on Apr. 19, the first in over two decades.

The stage is now set for one of the most disruptive labor-government confrontations in Europe, outstripping clashes over wages and working hours in Germany and France. "We have started a conflict that has broken the possibility of any real change. There will only be fighting," says Paolo Corvini, CEO of Societa Europa Tessile, a Rome-based textile manufacturer. "Right now, I don't know who is going to invest in our country."

Italy may be the most dramatic example of labor strife in Europe, but the issue roiling Italians goes right to the heart of the Continent's problems. Rigid labor rules crimp growth and competitiveness across the EU. Business leaders say halted progress on labor reform underscores the need for an EU-wide Workers' Statute that updates and harmonizes rules. "That would be the most logical approach," says Mario Moretti Polegato, CEO of Geox, a Treviso-based maker of shoes.

Berlusconi and his advisers thought they could get the ball rolling by initiating a small change to Italy's labor rules. They proposed amending a law that protects workers from dismissal, but they wanted to loosen the rules for firing only in certain situations, such as companies in the depressed south that shift part-time employees to full-time contracts. Although the law was a temporary change for a trial period of four years, experts say it was hugely symbolic and would have encouraged further chipping away at the statute. Labor knew immediately what was at stake. "The government made a big mistake. It underestimated the opposition," says Tito Boeri, an economics professor at Bocconi University.

Once labor unions dug in their heels, Berlusconi neglected to persuade Italians about the benefit of the proposed change: When it's easier for employers to fire, they're much more willing to hire. "The point of the reform is to encourage the hiring of new employees. This crucial point was never clearly communicated," says Paolo Scaroni, chief executive of Pilkington PLC, a glass producer based in London with 2,500 employees in Italy.

Berlusconi also blundered by springing his proposal on the unions without warning. "Any sense of trust that workers may have had was destroyed with the government's attempt to pull the wool over our eyes," says Luigi Angeletti, general director of UIL, Italy's third-largest union, with 1.8 million members. Finally, the draft law makes references to improved unemployment-insurance benefits--but provides no funding. Since 90% of Italian workers lack unemployment insurance, unions staunchly defend the job-protection clauses.

The confrontation turned violent on Mar. 19, with the murder of Biagi. Italians were stunned by the claimed involvement of the Red Brigades, the guerrilla group that murdered public figures in Italy in the 1970s and '80s. Italians believed that the country's decades of political assassinations had largely drawn to a close with the end of the Cold War. But some of the terrorist cells have hung on, targeting reformers in the center and center-left. Most experts consider the group isolated and extremist. Even Berlusconi insisted on Mar. 26 that Biagi's murderers had no links to labor unions.

An embattled Berlusconi vows to push ahead with the controversial law. If his government majority in parliament approves the amendment, opposition leaders say they will challenge it with a referendum. That could put reforms in a state of limbo for a year. It could also undermine the government of Berlusconi, who, as Prime Minister for seven months in 1994, saw his coalition collapse after massive union resistance to pension reform.

Much will depend on the government's ability to defuse the escalating crisis, which has raised fears among workers who voted for Berlusconi of a Thatcher-like attack on their job security. As Marco Fenudi, 42, a Tuscan computer engineer who protested in the Mar. 23 demonstration, puts it: "We are against the government because it doesn't want to protect our rights."

Those are fighting words against Italy's richest man. Ex-CEO Berlusconi sailed to victory last May, buoyed by voters enchanted with his promises of prosperity for all and his upbeat vision of Italy's future. But the message he failed to convey is that changing an outmoded economy will take pain. Hemmed in by a sluggish economy, budget pressures, and rising social conflict, Berlusconi is just beginning to realize that making good on his word will require more consensus-building and fewer showdowns.

By Gail Edmondson, with Kate Carlisle in Rome

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