Giorgia Meloni faces economic storm as she prepares to take helm in Italy
Likely new prime minister poised to take power as recession looms and high energy prices hit businesses and households
Until midsummer, Italian ceramics company Saxa Gres was on a high. It had record first-half sales of €50mn — up from €43mn for all of 2021 — as demand for its cobblestones and faux stone paving slabs surged in the wake of the post-coronavirus construction recovery.
But in July, Francesco Borgomeo, the company’s president, shut down its three kilns and furloughed 500 employees as soaring gas prices made production economically unviable. “I had no other option,” he said. “I had to protect the company. It is impossible to produce like this. I am waiting for the storm to pass and then we will reopen.”
Saxa Gres’s woes are symptomatic of the deepening distress among Italian manufacturers in energy-intensive industries such as ceramics, paper, glass and metal, many of which have also slowed or suspended production. Their woes highlight the daunting task confronting Italy’s prime minister in waiting Giorgia Meloni as she prepares to lead the country’s most rightwing government since the second world war.
The former teenage neo-fascist activist is poised to replace incumbent prime minister Mario Draghi, a former European Central Bank president, after her rightwing bloc emerged victorious in last month’s elections.
President Sergio Mattarella is expected to formally ask her to take the job, and form a government in the coming days, as Italy faces a looming recession, with skyrocketing energy prices eroding corporate profits and squeezing household incomes.
Meloni, and whomever she recruits as finance minister, will have the challenge of maintaining the stability of Italy’s public finances and keeping public debt — currently 150 per cent of GDP, the highest of any major eurozone economy — on a downward trajectory, even as Italians clamour for relief from spiralling costs.
“The new government gets in at a bad time,” said Lucrezia Reichlin, an economics professor at London Business School. “There are lots of clouds on the horizon and not a lot to be optimistic about.”
The IMF warned last week that Italy is heading for recession, projecting that its economy would contract 0.2 per cent next year. The Bank of Italy has forecast marginal growth in 2023 of 0.3 per cent with inflation of 6 per cent, but warned of a potential contraction of 1.5 per cent and inflation of 9 per cent if Russia cut all energy supplies to Europe.
Even under current conditions, some banks are already forecasting a more severe recession for Italy, which depends on gas for around 50 per cent of its electricity generation.
“It’s going to be extremely tough,” said Lorenzo Codogno, former director-general of the Italian treasury department. “The country is going through a substantial slowdown — probably recession — and there is a massive squeeze in incomes due to the cost of living crisis.”
Meloni’s Brothers of Italy party, which until now has been in opposition since its formation a decade ago, has few obvious finance minister candidates to steer Italy though the turbulence.
Instead she had been seeking a respected technocrat to reassure markets — and the ECB — that Italy’s public finances will be in competent hands. But so far those Meloni has tried to recruit, such as ECB director Fabio Panetta, have been reluctant.
Speculation is mounting that she will turn instead to Giancarlo Giorgetti, a senior member of Matteo Salvini’s populist League who served as economic development minister in Draghi’s government and is seen as one of the party’s more moderate, pro-Europe figures.
Meloni said last week she considered Giorgetti an “excellent” person for the job and he has indicated a willingness to take it if tapped. Whoever gets the portfolio will be in for a tough time. “It’s a very hot potato,” Codogno said.
Prior to September’s election, Meloni — who once slammed “big financial speculators” that she said wanted to turn Italians into “slaves”, repeatedly emphasised the importance of fiscal prudence as she sought to signal her reliability to Italian bond investors
Since her electoral victory, though, she has acknowledged the need to offer “concrete help” to families and businesses struggling with rising costs — among Italians’ top concerns, according to opinion polls.
Ludovico Sapio, European economist at Barclays, said the new government would have to “strike a balance between prioritising growth and prioritising fiscal prudence” as it weighed up whether to extend measures adopted by the Draghi government to shield consumers from rising energy prices or to fulfil election campaign promises of tax cuts.
“Given the circumstances, an extension of . . . the energy-mitigating measures would be welcome, but it doesn’t seem that Italy can afford a package of the size that we are seeing in the UK and Germany,” Sapio said. “They will have to make a political choice not to include measures that could be seen as controversial or fiscally irresponsible.”
Italy’s options are complicated by the efforts of central banks across the world to combat inflation.
“Monetary policy has made markets hypersensitive to the fiscal space and debt sustainability concerns,” Sapio said. “It’s natural for markets to get concerned about the sustainability profile, or credit risk, for countries with high debt.”
Codogno said raising money for any substantial economic support for struggling households and enterprises will prove challenging unless the EU is willing to fund such measures with common borrowing, similar to its Covid-recovery fund, of which Italy is due to be the largest recipient.
Ceramics company chief Borgomeo is also looking to Brussels for relief, hopeful the EU will finally agree a price cap on natural gas. Without joint EU action, he warned, Italy would come to a standstill.
“If they don’t cap gas prices, especially in Italy, every activity will stop,” he said. “There will be a lockdown for energy. It will be social and economic disaster.”