On her first day in office Italy's Prime Minister Giorgia Meloni renamed the country’s economic development department as the “Industry and Made in Italy Ministry”. It appeared to be a small bureaucratic tweak. An easy change of branding for a government inheriting almost €3 trillion ($3.2 trillion) of debt that will curb spending on new policy initiatives. Instead it was a statement of intent by Italy’s first female prime minister of her plan to introduce what some have dubbed a nationalist vision for corporate Italy — one that views dozens of state-owned companies as a way to cement power and drive change in the economy.
From a €20 billion deal to buy Telecom Italia’s network to the recent sale of a stake in ITA Airways and attempts to restrict the role of Chinese owners at Pirelli SpA, the Meloni government has already intervened in Italy Inc. The aim: to influence and reshape the country’s long term industrial strategy and institutions. Meloni is not the first Italian premier to intervene in state-owned companies. But the outsider, who came to power as leader of a small far-right party, is determined to secure control over strategic infrastructure.
Top of her “Italy First” agenda is the creation of national champions in areas from energy to fashion and luxury and the launch of a sovereign wealth fund to finance them. But, the prime minister is engaged in a delicate balancing act, morphing from the populist campaigner — anti-immigrant, dismissive of LGBTQ rights and protective of Italian sovereignty — to pro-investor, steadfast in her support of Ukraine in its fight against Russia and navigating a right-wing coalition of vested interests.
As part of that shift, Meloni is overseeing complex financial deals which only go ahead with her approval, according to several people involved in the process, who asked not to be named. The deal to sell the ITA stake to Deutsche Lufthansa AG was effectively rubberstamped during discussions between Meloni and German Chancellor Olaf Scholz at the Group of 7 meeting in Japan in May, days before it was agreed.
There have been missteps. The most high profile was the mishandling of the changing of the guard at Enel, the energy group 24% owned by the state and critical to the success of corporate Italy. The appointment of a new chairman became tangled up in intense bargaining inside Meloni’s coalition with the eventual outcome interpreted by some as a defeat for her. The move unnerved some investors worried about possible threats to the financial stability of the country.
Meloni’s greatest success to date is something that did not happen. Despite widespread predictions that the markets would react poorly to her election last September, Italy’s infamous “spread” — the difference between Italian and German bond yields which is crucial to the sustainability of about €2.8 trillion of the country’s debt — has remained virtually unchanged. “Everyone was saying grasshoppers would have come, the stock market would have crashed,” Meloni told Italian TV in a rare interview on Monday. “But now, the stock market is going well, the spread is lower than the previous government, hedge funds have stopped betting against Italy’s public debt.”
Her plan for corporate Italy relies on keeping it that way, with public finances in check. By a fluke of timing — the positions are rotated every three years — Meloni has the chance to hand pick scores of like-minded people for senior roles at the top of key state assets. In theory such involvement would give her government a greater influence over everything from new energy contracts signed by Eni to job creation efforts or reducing debt in other sectors. A form of insurance, perhaps, that her policies will be carried through at a corporate level even if she loses power in a country where no post-war government has served a full five-year term. It also means moving politically towards the center, potentially ostracizing some of the right-wing voters — attracted by her relentless anti-immigrant messaging — who brought her to power.
“Meloni's nationalist narrative is demagogy aimed at pleasing her voters,” said Laura Orlando, Italy managing partner at Herbert Smith Freehills global legal firm, “rather than designing a solid strategy to build Italian corporate giants.”
Her Brothers of Italy Party won just 26% of the vote, but is part of a right-wing coalition that controls both houses of parliament. Many believe disarray in the opposition and the survival instincts of her coalition partners could deliver Meloni a full term in power.
“Meloni is ultimately a national conservative and her politics involve pragmatic responses to external challenges,” said Giovanni Orsina, director of the School of Government at Rome’s Luiss University. “She has a good chance of staying the whole five-year term. And has the luck to be able to place her people in the corporate world. It is only natural that she should take advantage of it.”
Will China Gamble Backfire?
The team around Meloni — a hybrid of family and decade-long friends, plus technocrats who served in the governments of Silvio Berlusconi, the former prime minister — must now help her grapple with decisions that could define her time in power and Italy’s place in the world.
None more so than relations with China. The government must decide by the end of the year whether to renew its involvement in the Belt and Road Initiative, China’s investment pact designed to deepen economic ties with allies across the world. Italy is the only G-7 member country in the program and its 46-year-old leader — described by close supporters as assertive, self-aware and strategic — is under pressure to pick sides in the increasingly fraught rivalry between China and a US suspicious of Beijing’s ambitions.
For Italian businesses which have invested in China or those with Chinese investors — ranging from Pirelli to Inter Milan football club — there is a fear of a backlash from Beijing if there is any abrupt move.
The China decision is a minefield, admitted one official on condition of anonymity. “We need to cut the agreement in a silent way, not to blow it in China’s face,” the official added. “It is impossible to think that we can avoid doing business with China.”
Italy joined the BRI in 2019, a decision made by a quirky government backed by both the populist Five Star Movement and Matteo Salvini — now a key member of Meloni’s coalition and leader of the right-wing League. China’s President Xi Jinping was welcomed to Rome to announce the agreement amid fanfare, but also criticism from the EU and US, worried about Italy’s growing closeness to both China and Russia.
The government gambled that membership of the BRI would turn Italy into a gateway for Chinese investment into Europe. Yet, according to data compiled by Rhodium Group, Italy has not enjoyed as great an uptick in investment as it might have expected. Between 2000 and 2022, China invested about €16 billion in Italy, compared to €17 billion in France and €32 billion in Germany. Bank of Italy data show that China's direct investment stock into the country did not change significantly after 2019, hovering just under €5 billion annually until 2022. It does, however, remain a key destination for Italian exports — shipments to China rose above €7 billion during the first quarter of this year, further complicating Meloni’s decision.
A critic of the original BRI deal, the prime minister must now decide whether to allow it to automatically renew for another five years on Dec. 22 or opt out knowing that ending the agreement risks trade retaliation by Beijing and potentially her plans to reshape corporate Italy.
About 2,000 Italian companies are active in China, according to the Italy-China Foundation, employing about 157,000 people and business worth €17 billion. Big industrial companies like shipbuilder Fincantieri and brakes-maker Brembo, plus some state-owned companies, could be at risk in any tit-for-tat backlash.
Italian officials insist privately that its membership of the BRI will not be renewed. Meloni had been expected to use last month’s G-7 summit in the Japanese city of Hiroshima to brief member states on Italy’s position, but no decision has yet been made public.
"We still have time to think what to do on China's BRI," the prime minister told a press conference in Hiroshima. “Whatever decision we will take will have consequences. You know what my opinion was, and I have not changed my mind about it. But conditions have changed.”
With interest rates still edging higher across Europe and lackluster economic growth, it is becoming increasingly difficult to service Italy’s debt, which stands at 145% of economic output amid mounting concern that the country’s financial system remains over reliant on waning support from the European Central Bank. Meloni promised to protect Italians from hardship and rebuild the post-Covid-19 economy and the country cannot afford a conflict with a major trading partner.
That sentiment is acute within Italian business. At Singapore's Raffles Hotel in May several Italian executives met informally to discuss the impact of their government quitting the BRI. All asked to remain anonymous for fear of retaliation from Beijing, but said they are lobbying the Meloni government to delay the decision. One executive, whose company has billions invested in China, said an exit this year will not allow businesses enough time to reduce their exposure to China, something several are slowly doing. Many fear being locked out of the Chinese market.
Government advisers in Rome are investigating concessions to Beijing — from an easing of some import and export tariffs to trade deals and investments linked to specific sectors — to reduce the damage of any withdrawal.
“How Meloni will solve her dilemma on Italy’s role in the Belt and Road will be a watershed moment for her government,” said Nathalie Tocci, director of the Istituto Affari Internazionali think-tank, and former board member of Eni SpA. “She used an unwavering support for Ukraine and to the US as a way to gain the trust of international partners
“Up to now,” added Tocci, “this has worked.”
Meloni’s Balancing Act
Meloni’s backing for Ukraine put her at odds with two of her key political allies: Berlusconi, a personal friend of Vladimir Putin, and Salvini who has said that Russia’s president is a better leader than Angela Merkel, Germany’s former chancellor. Some compromises with Salvini have been easy — agreeing to build a bridge between Italy and Sicily, a plan which has been discussed since ancient Roman times — others have cost Meloni political capital.
When she bowed to Salvini over the appointments at Enel, investors took note. Until April, Enel, Italy’s biggest company valued at more than €60 billion, was led by Francesco Starace, brother of Italy’s ambassador to Russia. Starace handled the company’s exit from Russia after the invasion of Ukraine. But he was among a handful of executives to attend a business forum with Putin in February 2022, despite a government request not to.
When he stepped down as Enel chief executive officer in April 2023 it sparked weeks of political manoeuvring that ended with Meloni locked in a room with Salvini and a handful of advisers to select his successor and a new board. The expectation was that the job would go to a Meloni ally. Instead, after several hours of negotiations Flavio Cattaneo, close to the League and Salvini, emerged as CEO and Paolo Scaroni as chairman. Picking old-school managers like Scaroni — with connections to Moscow and Berlusconi — angered some investors, many of whom believed the decision had weakened the prime minister.
Following the surprise appointments, Enel shares fell by as much as 4.5%, but they have since recovered and are now trading around the same level they were 12 months ago.
London-based Covalis Capital LLP challenged the appointment of Scaroni and accused the government of running an “opaque” nomination process. While the one-month boardroom standoff ended with investors backing the prime minister the episode bruised her credibility and raised doubts over whether she will be able to force through changes at the top of other key state companies.
Several corporate deals have also drawn close government attention. Meloni has come under pressure from the automotive lobby association to buy a stake in the Italian-French carmaker Stellantis to counter the influence of France, which owns 6% of the company.
But Giancarlo Giorgetti, Italy’s finance minister, has dismissed any suggestion that the government would buy into the company. “The State should intervene only when the market fails or to protect strategic national interest,” he told Bloomberg’s Italy Capital Markets Forum on Monday.
Telecom Italia has been the most contentious target. The former monopoly is at the center of negotiations over the sale of its network and the future role of its largest shareholder, French conglomerate Vivendi. While the government has repeatedly said it wants to keep control of the network, the structure of any deal is yet to emerge.
Negotiators in Palazzo Chigi, the prime minister’s official residence — ranging from Meloni's chief of staff to advisers and coalition ministers including Salvini — have discussed several scenarios. These could lead to Cassa Depositi e Prestiti SpA — which already owns a 9.8% stake — buying the assets, or a sale to US private equity firm KKR & Co. Despite the sovereignty concerns over selling to a US group, the KKR option could succeed if Cassa Depositi or a different government investment body takes a minority stake in order to safeguard Italian interests, according to people familiar with the ongoing talks.
“For Meloni, a slew of highly political corporate appointments is a way to distribute power without being too caught up in the public debate,” said Martina Carone, a political analyst at YouTrend. “While the fate of companies worth billions is key for investors it is not closely followed by her right-wing electorate. Meloni seems stable, her opposition is in disarray.”
“But her strategy also has a risk,” Carone added. “It is likely that when Meloni's perceived novelty loses its shine, tensions within her coalition will emerge and that could happen earlier than one might think.”
--With assistance from Giovanni Salzano, Alberto Brambilla, Jody Megson and Carla Canivete.
©2023 Bloomberg L.P.
