Commentary: A Fiat Bailout: Berlusconi's Moment of Truth
By Gail Edmondson
Top managers of the crisis-plagued Fiat group rushed to Arcore, near Milan, on Sunday, Oct. 13, for an urgent meeting with Italian Prime Minister Silvio Berlusconi at his private estate, Villa San Martino. On the emergency agenda: state participation in a rescue scheme for the world's sixth-largest auto maker.
Italy is reeling from Fiat's Oct. 9 announcement that it will lay off 8,100 workers. But that alone won't stem the accelerating financial meltdown at Fiat Auto. With sales plummeting and operating losses set to top $1.2 billion this year, fears are mounting that the country's largest industrial company is in a terminal slide and cannot wait until January, 2004, to exercise a put option that compels General Motors Corp. to buy the Italian carmaker outright. "Fiat has to sell sooner [than that]. Standing by itself, the situation is hopeless," says one banker close to the company.
Fiat's black cloud casts an ominous shadow over Italy. The crisis at the 103-year-old auto maker extends beyond its parlous finances. It reflects an erosion of competitiveness nationwide. Italy trails in fulfilling the European Union goal of opening up markets, and free competition is still more rhetoric than reality.
Fiat patriarch Gianni Agnelli for decades persuaded politicians to shelter the carmaker's domestic market from real competition and grant it endless concessions, including state aid--thus perpetuating a deeply entrenched culture of rigged markets. Now, it's clear Fiat's cozy links with government backfired and the scramble to compete has been too little too late. "Fiat reflects the weakness of Italian capitalism," says Roger Abravanal, a partner at McKinsey Milan.
Berlusconi is contemplating an emergency bailout of Fiat. If he wields state aid to avoid the much-needed restructuring and layoffs, Berlusconi may scupper the pending takeover by General Motors and seal Fiat's fate as a ward of the state and its creditor banks. The media mogul would also be reneging on his pledge to change the way Italy works.
Backed by industry, the founder of Italy's only private TV group was swept into power in May, 2001, on his promise to fuel growth by slashing taxes and liberalizing markets. But instead of cutting state spending, Berlusconi's center-right coalition has, like Fiat's managers, tinkered only at the margin--and shown a similar fondness for overly optimistic projections. Few industry leaders were fooled by Finance Minister Giulio Tremonti's upbeat economic forecast of 2.6% growth for 2002, which he defended until June and finally revised down to 0.6% in September.
The same happy talk prevails on the tax front. Berlusconi claims he's slashing taxes, but the $5.5 billion in tax cuts for low-wage earners in the 2003 budget will be balanced by reductions in federal transfers to local governments. They will probably respond by raising their own taxes--nullifying Berlusconi's cuts. "Berlusconi is good at selling hot air," says Daniel Gros, director of Brussels' Center for European Policy Studies.
A bailout for Fiat would strain the state's coffers just when it can least afford it. Italy's total debt is expected to reverse its steady decline and edge back up to 110% of gross domestic product--the highest in Europe. Berlusconi's government must streamline a bloated bureaucracy, tackle pension reform, and boost labor-market flexibility before it can realistically deliver true tax cuts. "The real structural reforms that were promised are lacking," says Emma Marcegaglia, chief executive of Gruppo Marcegaglia, a Mantua steel conglomerate. "In periods of difficulty, you need to act even more strongly."
The easiest and quickest medicine Berlusconi could apply to the Italian economy would be to accelerate privatization and liberalization. Large ex-monopolies still dominate in the country's energy, gas, and telecom markets, keeping prices high. Instead, with the promise to rescue Fiat, Berlusconi would be indulging in the protectionism of old. Now is the moment of truth. If Berlusconi wants to prove the doubters wrong, he must lead Italy out of the woods and into a competitive global economy.
Edmondson covers Italian politics from Rome.