Commentary: Why Berlusconi Should Help Fiat Shrink

By Gail Edmondson

The June 10 dismissal of Fiat Chief Executive Paolo Cantarella is the surprise ending to a sad chapter in the Italian auto maker's history. During his 12-year tenure, the 57-year-old engineer presided over a steady decline in the fortunes of flagship Fiat Auto (FIA ), which has lost $2.6 billion over the past four years and an additional $403 million in the first quarter.

Now it has reached the point where Fiat is not just an investment catastrophe. It is a political emergency of the first order. For all his preaching in favor of the free market, Italian Prime Minister Silvio Berlusconi does not want to preside over the collapse of Italy's most revered industrial icon, or see it fall into the hands of foreigners.

But Berlusconi is in a fix. A big old-style government bailout is not an option, as long as EU competition watchdog Mario Monti sits in Brussels. So the best that Berlusconi's people have come up with so far is a proposal to grant small tax breaks designed to stimulate purchases of new cars.

There's one strategy Berlusconi could pursue to help both Fiat and Italy: support a radical downsizing of the Turin-based carmaker that gives it a shot at survival. Fiat has a manufacturing capacity for 2 million units but sold only 1.4 million cars last year. Its market share has dropped from 13.8% in 1990 to 8.3%, and analysts say there's little chance of it recouping much.

That means Fiat desperately needs to cut capacity and jobs to rein in costs. "What Fiat needs more than anything else is Berlusconi's support for closing production and layoffs," says Karl Ludvigson, a London auto-industry consultant and former Fiat executive. Newly appointed Fiat Auto CEO Giancarlo Boschetti has promised to close three production lines and lay off 3,000 workers. But industry insiders say that's not nearly enough. Production cuts on the order of 15% to 20% would give Fiat a better chance of recovery. And of a total 38,000 employees in Italy, at least 15% should go.

Supporting a layoff of 6,000 Italians sounds like a recipe for political suicide, doesn't it? True, layoffs are political dynamite in Italy. But if he plays his cards right, Berlusconi could yet use the crisis at Fiat to transcend hard-line ideological differences and jump-start a national dialogue on broad-based labor market reforms. Fiat's struggles could also provide the catalyst for policies designed to spur economic renewal rather than defend the status quo.

Picture this: Berlusconi goes on TV to tell the nation the truth about Fiat and why the auto maker needs a massive restructuring to survive as a smaller but healthier company. The Prime Minister vows to support the painful transition with a massive retraining program for laid-off workers. Government officials invite employers in northern Italy, who are desperate for qualified employees, to draft a blueprint of industry's needs.

To further soften the social impact of a radical Fiat overhaul, the government also could provide laid-off workers with unemployment insurance--which is not universal in Italy, though it should be. Nothing for Monti to object to there. The partially government-funded scheme could eventually be extended nationwide--a move that may nudge Italy's hard-line unions to make some concessions of their own. This policy mix has been successfully deployed in economically hard-hit areas such as Dresden and Jena in eastern Germany. Even in Italy, an ambitious retraining program and state-aided layoffs at Poste Italiane have transformed the bankrupt postal service into a profitable company.

On the campaign trail, Berlusconi pledged to lay the foundations for a modern economy that could compete in the era of globalization. Fiat is an object lesson on the perils of old-style Italian protectionism. By helping Fiat shrink to a size commensurate with its capacity to sell cars, Berlusconi could be writing a fresh chapter in the carmaker's troubled history, rather than its epilogue.

Rome bureau chief Edmondson covers Italian business and politics.

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