Italy grapples with uncertainty of constitutional reform vote
Anti-business sentiment still at the forefront of investors’ minds
At a rally in Milan’s Piazza del Duomo two years ago, Beppe Grillo, leader of Italy’s populist Five Star party, and Dario Fo, the recently deceased Nobel Prize-winning playwright, took aim at Fiat boss Sergio Marchionne. They accused Mr Marchionne — Italy’s largest private employer — of engaging in the “politics of blackmailing workers”, in reference to recent job losses. A chant started of “Marchionne go to hell”. Mr Fo said he “discovered for the first time what it was to be a populist”.
Anti-business sentiment in Italy is still at the forefront of investors’ and business leaders’ minds as the country’s referendum on constitutional reform approaches. Analysts predict that the vote on December 4 could unseat reformist prime minister Matteo Renzi.
Mr Renzi — who wants Italians to vote Yes to the reforms — is neck and neck with opponents led by Mr Grillo. With the outcome uncertain, business is bracing for a shock, particularly after the UK’s unexpected Brexit vote.
Businesses’ main concern is the fallout if Mr Renzi loses. Executives fear it could result in political instability and a hiatus in desperately needed reform, at a time when Italy’s banking sector is fragile.
Pietro Salini, chief executive of Italy’s largest construction group Salini Impregilo, said this month that if the referendum went “the wrong way”, there was “a threat of a large part of industry going elsewhere”.
For Mr Salini, the wrong way is “a way that puts Italy without a government, without the possibility of having new elections, without the possibility of a government that is sufficiently reliable”.
Marco Tronchetti Provera, executive chairman of tyremaker Pirelli, which is owned by ChemChina, says a No vote would mean Italy “would be perceived as a country that does not want to do reforms”. It is a view shared by Rodolfo De Benedetti, chairman of the industrial group CIR which operates in media, healthcare and auto parts, and a supporter of the Yes campaign. He says reform “is the choice between change and conservatism” — although he adds that the possibility of a No vote “is not the end of the world” and “the country will survive with all its opportunities and potential and its problems and challenges”.
Supporters of a No vote have argued — with some vitriol — that business leaders and foreigners have no business “interfering” in the vote of citizens. But this suggests a misunderstanding of how much Italian companies have become vulnerable to foreign investor sentiment.
Just 3 per cent of institutional investors in Milan’s stock exchange are Italian, according to Borsa Italiana. And, while Italian banks have traditionally been the main lenders to Italian companies, foreign credit has become decisive here, too. Of the funds looking at buying some of the €200bn of gross bad loans weighing on the Italian banking sector, most are from overseas. George Muzinich, chairman and chief executive of US corporate credit investor Muzinich & Co, says: “The structural reforms undertaken by the government encouraged us to look favourably on making a long-term investment in Italy.”
Credit rating agency Moody’s has also warned that instability following a No vote would increase the risk of capital increases for Italy’s weakest lenders.
Even so, many executives do not think Mr Renzi’s administration is doing enough. While his first 18 months in office produced significant reforms in banks, labour and administration, it has been less effective since. Investors and executives today complain that reforms were not followed through or properly communicated.
Competitiveness has improved. Last year, Italy climbed nine places in the World Bank’s “Ease of Doing Business” rankings, to 45th place out of 189 countries.
But despite an initial rally in stocks and bonds, investment in Italy’s real economy has not recovered since the financial crisis, according to Eurostat data.
Mr Renzi needs more time, supporters such as Mr Marchionne say. But arguably as significant for Italy is the vote that Mr Marchionne and his investors have already made with their feet. Since that rally in Milan, Fiat Chrysler, Ferrari and Exor, the Agnelli family holding company, have moved their financial and legal headquarters and, in Fiat Chrysler’s case, its primary listing, out of Italy.