Italy’s economy recorded its steepest-ever drop in Q2 this year, declining 12.8%.
Revised second-quarter figures, published on August 31st, confirmed that Italy, hard-hit by the pandemic, is falling into a punishing recession. Italy’s economy recorded its steepest-ever drop in Q2, sinking 12.8%.
With a 90% reduction in the summer tourist arrivals – the lifeblood of many Italian cities’ economies – the fiscal pain will likely continue. For its part, the OECD estimates Rome’s GDP will shrink by 10.5 % this year.
Naturally, the Italian government plays an outsized role in overseeing the national economy given such dire circumstances. But Rome’s recent interventions seem underpinned more by populism and dirigisme than by the need to minimise the pandemic’s economic consequences. In a particularly worrying case, the extraordinary lengths to which Giuseppe Conte’s administration has gone to renationalise Italian motorways will spook investors, at best, and at worst could be a blatant infringement on EU laws.
The case has already sparked a complaint from one of the shareholders involved in the dispute, before the European Commission accusing Italy of breaching EU law. It’s a complaint that Brussels can’t afford to ignore. The EU has repeatedly warned against the erosion of the rule of law in Eastern European countries—but they cannot embrace a double standard by turning a blind eye to Italian violations of EU principles.
Broken promises and shifting goalposts
The motorways dispute comes on the heels of a host of heavy-handed state interventions—from the renationalisation of Alitalia to Rome’s attempts to recreate a vertically integrated broadband monopoly in which it would be a major shareholder. Italy’s manoeuvring to regain control of Autostrade per l’Italia, privatised in 1999 and currently owned by holding company Atlantia, is the most alarming example yet of state interference in the Italian business landscape.
The elaborate machinations to take over the motorway system have scared off investors and sparked concerns that the government could bend the rules to expropriate other private property. Italy has been trying to renationalise Autostrade for two years, but was stymied by provisions in the original contract stipulating that if the agreement was terminated before 2038, Rome would have to buy Atlantia out—at a cost of some €23 billion. In late 2019, the government found a workaround in the so-called Milleproroghe decree, which unilaterally amended the motorway contracts— including by reducing the termination fee to €8 billion.
Such sweeping legislation, combined with Rome’s threats to revoke Atlantia’s concession outright if it did not cooperate with the new regulations, caused the firm’s shares to plunge and major ratings agencies to revoke its investment grade status. Atlantia was forced to agree to a plan in which Italian state lender CDP will take an initial 33% stake in Autostrade and handpick private investors to buy another 22%.
Atlantia unsurprisingly asked the EU to intervene, arguing that the Milleproroghe law “[lacked] any objective justification” and was carefully crafted to compel the firm to sell its majority stake in Autostrade to the state at a bargain-basement price. Several of Atlantia’s shareholders have taken their own action against Rome. UK hedge fund TCI, along with several other funds, have lodged complaints calling on Brussels to launch infringement proceedings over Rome’s attempt to take over Autostrade, alleging that the Italian government has broken at least eight EU legal principles and is attempting to illegally expropriate its property.
All the wrong signals
“What the government is doing is illegal and it will have a chilling effect on international investments into Italy,” TCI founder Sir Christopher Hohn warned. Analysts agree that the move will make investors skittish. Bloomberg columnist Ferdinando Giugliano suggested the government is “playing with fire” and that investors, fearing further arbitrary action by Rome, may start demanding discounts for holding Italian assets.
Rome’s official explanations for why it would take such a financial and legal risk fall short of the mark. It has attempted to use multiple crises to cover for its sudden interventionist economic streak. In addition to the coronavirus pandemic, Italian officials have repeatedly pointed to the tragic 2018 collapse of Genoa’s Morandi Bridge, operated by Autostrade, to justify their relentless crusade against Atlantia and its shareholders.
The populist Five Star Movement (M5S) has seized on the lingering anger over the horrific bridge accident to try and boost its sinking standing ahead of regional elections this month, a symptom of the fact that M5S’s anti-establishment bent was more effective in opposition than in government.
In a similar vein, the Italian government might find managing Autostrade a pyrrhic victory. One expert from Bocconi University suspected that the state won’t identify many takers willing to sink cash into the country’s aging infrastructure. Another, from Luiss University, questioned whether the government had the management skills to handle the complexity of Italy’s nearly 7,000 kilometres of motorways. After all, the Morandi bridge collapse was only one of eight bridge collapses in Italy since 2013. Six of these were managed by a state-controlled company—the very firm which would take over managing Autostrade if Rome has its way.
Equal treatment on rule of law
Whether or not Italy’s government is up to the task of managing its motorways, European institutions should be extremely perturbed by the way it has gone about renationalising them. The EU has struggled to respond to rule of law concerns among its member states and has focused the lion’s share of its enforcement on egregious cases like Poland and Hungary.
Italy has largely escaped censure, even as red flags have stacked up: an Economic Intelligence Unit report categorising it as a “flawed democracy” and highlighting its dangerous backsliding on rule of law issues; expulsions of Roma in defiance of ruling by the European Court of Human Rights; institutional weakness in the judicial system.
With the motorways dispute again drawing attention to how Italy’s populist government plays fast and loose with EU rules and the European Commission preparing to unveil its first-ever rule of law report later this month, Brussels has the perfect opportunity to take a harder line on countries like Italy that have heretofore slipped through the cracks.