The Berlusconi effect: High Price of Italian prosperity

By Pierre Musso, Le Monde diplomatique, April 2002

Two million people took to the streets of Rome last month to protest against terrorism, against economist Marco Biagi's assassination and against Sylvio Berlusconi's government. Behind the protest and beyond the politics, Italian capitalism is being profoundly restructured.

Italy's place in the rankings published recently by the Organisation for Economic Co-operation and Development (OECD) came as a surprise: in terms of gross domestic product per capita, Italy outpaced Sweden while the United Kingdom and France trailed in 19th place (1). But Italy's unemployment rate is still very high, with nearly one in three young Italians out of work. Still, many observers now realise that Italy is a wealthy country, not a member of the “Club Med”, as believers in German-style capitalism refer to the south of the European Union.

The former prime minister, Giulano Amato, prefers the term dwarf capitalism (2), in which the economy is dominated by a handful of family-run businesses accompanied by a dynamic group of small and medium-sized businesses. According to the OECD, “the Italian industrial structure is dualistic, where a small number of large corporations coexist with a vast network of small and medium-sized firms” (3).

Italy's capitalists have been caught up in action since last summer. The country's restructuring has accelerated with the election last year of Silvio Berlusconi, media magnate, wealthiest man in Italy, 14th richest in the world, whose cabinet includes 12 small-business owners. Berlusconi, who campaigned for an entrepreneurial-style presidency using marketing strategies and management techniques, has helped establish a new model for Latin capitalism.

At first glance Italy's capitalist system may appear convoluted, given the country's extensive underground economy and the phenomenon of cross-ownership. But the system is ultimately controlled by a national oligopoly made up of shareholder financiers. The multifaceted nature of Italian capitalism stems from the country's distinctive pattern of industrial development. It would be more accurate to call it varieties of capitalism, since the systems of production in use differ according to region.

The Fordist model historically produced two Italies: the wealthy industrialised northwest and the poor agricultural south. The Italian system has two main components, one financial, the other industrial. For many years Italy's financial system was headed by three large mixed-ownership banks, all founded a century ago: the Banca commerciale italiana (BCI), Credito italiano and the Vatican-linked Banco di Roma. In 1944 they merged to form merchant bank Mediobanca, led by Enrico Cuccia, Italy's financial wizard and business overlord. Fiat (automobiles) and Pirelli (tyres) were the country's industrial heart.

Alongside Cuccia, two condottieri (captains of industry) helped plot the course of Italian capitalism on the Fordist model: Giovanni Agnelli in the 1960s and Carlo De Benedetti in the 1970s. The triumvirate was ended by Cuccia's death in June 2000, which began transformations that have demonstrated the flexibility of Italy's system. In the 1970s post-Fordist figures such as Berlusconi and the Benettons, new-style condottieri, ran highly dynamic small and medium-sized businesses. Since then Italy has had three different regional economic models:

• The northwest industrial triangle, which relies on large automobile-related industries (Fiat, Pirelli) supported by a network of small industrial contractors. (Unlike the northwest, the northeast's industrial base, which developed later, relies on small and medium industry; the opening of Eastern European markets has helped it become the fastest growing area of Italy.)
• The Mezzogiorno region, Rome and southern Italy. The Marxist critic, Antonio Gramsci, called it the southern question: an economy based on large agricultural estates, marked by poverty, subsidies, bureaucracy, the mafia and underground economic activity. This is beginning to change thanks to the vitality of small businesses (4).
• Technologically specialised areas, including those producing textiles (Prato, Biella, Como), jewellery (Arezzo), furniture (Bassano), industrial machinery (Modena), eyewear (Cadore) and shoes (Macerata and Vigevano).

Small business boom

Whether operating independently or as contractors for larger companies in the northwest, small businesses now form the backbone of the economy. Almost 50% of Italy's 4m companies have fewer than 10 employees (against 35% in the EU) and only 20% have more than 250 employees (35% in the EU). Although only 1.7% of the total, medium-sized businesses are also an active force, drawing on their organisational flexibility and international growth in their rise to mini-multinational status.

There is also the mafia-influenced underground economy. In 1998 illegal and undeclared workers (including foreign nationals) made up 22.6% of the labour force, including 18% of those in the industrial and services sectors and 73% of agricultural labourers.

Over the past decade the system of family-based giants surrounded by small businesses has been completely reorganised: a wave of privatisations aimed to reduce the national debt (5) and liberalise large companies that ran business networks or that operated in the banking sector.

After the crash of 1929, fascist-inspired state capitalism developed in Italy, spurred on by the 1933 founding of the industrial reconstruction institute (Iri), which controlled the banking sector and 40% of the country's industrial enterprises. Post the second world war, the state extended its economic reach via three powerful holding companies: Iri, Enel (the national energy agency) and Eni (the national oil agency). In keeping with European developments, the Italian government, which had owned 50% of the country's industrial base, relinquished half of its stake in the 1990s.

Finance and mergers

Italy's privatisation programme generated $63.5bn, matching the total in the highly liberalised United Kingdom. One half of the programme was underwritten by households that used savings to buy shares (6), one third by foreign investors and the rest by institutional investors (7). The advent of a financier-based economy led to the triumph of Milan's stock exchange, which was privatised in 1997. From 1992 to 2000 the privatisation programme caused the exchange's share prices to soar by 500%, compared with 200% on the international markets.

At the same time the country's banking sector was consolidating with the merger of the Banca Intesa and BCI, while the two largest Italian insurance companies, Generali and Ina, merged to form the third-largest European insurer, behind Germany's Allianz and Paris-based Axa.

A number of state-owned banks were privatised while foreign banks began to assume a more prominent role. According to the OECD, the accelerated pace of privatisations, together with the explosion in take-overs and mergers-acquisitions, reinforced the large corporations' dominant stock market position. By late 1998 privatised companies represented over 50% of the market's overall capitalisation. The fluid nature of Italian capitalism was confirmed in 2001 with two economic and financial initiatives to protect the Montedison conglomerate and Telecom Italia, which led to Mediobanca's restructuring. Last year Fiat began an internal reorganisation.

This activity may be explained by Cuccia's death, during the latter stages of privatisation. The balancing act between the old school Fordist business leaders and the new wave of managers, together with the rise to power of Berlusconi's centre-right Freedom Pole coalition, have also created favourable conditions for businesses and corporate restructuring.

The shake-up last year began when France's state-owned electricity monopoly, Électricité de France (EDF), and Fiat launched a joint bid for Montedison, a conglomerate covering farm produce, shipbuilding, chemicals, engineering, pharmaceuticals, financial services and, in particular, energy (Montedison has a 61% stake in Edison and Sondel). Edison is Italy's second-largest electricity provider behind Enel, Italy's equivalent of EDF. Although electricity accounts for only 19% of Edison's earnings, EDF and Fiat's takeover bid was aimed at Montedison's electricity business, to the exclusion of other commercial activities. EDF bought Montedison shares last May, setting off a debate. The outgoing Amato government opposed the EDF, which had become the largest shareholder in Montedison, and issued an emergency decree suspending voting rights attributed to EDF's shares in excess of a 2% interest in Montedison's capital stock.

Last June Montedison filed a complaint with the European commission charging EDF with abuse of market power. A counteroffensive was organised. Three large banks with stakes in Montedison Banco di Roma, Sanpaolo IMI and IntesaBCI formed a pact to manage their interest jointly. But Fiat allied itself with EDF as part of the Italenergia joint venture, before launching a takeover bid for Montedison and its subsidiaries, particularly Edison. In July Montedison agreed to the takeover: EDF and Fiat combined forces to acquire a 58% interest in Italenergia, joined by Franco-Polish financier Romain Zaleski and an Italian banking consortium. The takeover weakened the position of Mediobanca, which had to relinquish its 15% stake in Italenergia although it earned a substantial profit.

Another corporate shake-up was of Telecom Italia, a privatised company. In 1999 a foreign takeover of Telecom Italia was averted and at that time Roberto Colaninno, head of Olivetti, assumed control of Telecom Italia, with the backing of Mediobanca and Massimo D’Alema's centre-left government. This shocked the economic and financial communities. But in 2001 Telecom Italia again faced potential takeovers by Spain's Telefónica (telecommunications) and Endesa (electricity), and by Deutsche Telekom.

Despite its neutrality, the Berlusconi government was pleased that the ownership of highly strategic Telecom Italia remained in Italian hands. In July 2001 Pirelli chief executive Marco Tronchetti Provera and the Benetton family, via its Edizioni holding company, bid 7bn euros ($6.13bn) to control Telecom Italia and its mobile-phone subsidiary (Tim), with the yellow pages and the new television channel 7 (the former TMC).

Enter the vampire

Along with Fiat's restructuring, such efforts illustrate the willingness of the condottieri to protect strategically important firms. Corporate restructuring has been an economic stimulus while ensuring that financial power remains in the hands of a few family-controlled holdings.

As a result, families that historically embraced Fordist capitalism, including old-brigade condottieri such as Agnelli (senator-for-life and Italy's economic viceroy) and De Benedetti, have been obliged to share power with new-style condottieri. These newcomers emerged in the 1970s, using small businesses to build wider empires, as in the case of Berlusconi and the Benettons, who transformed the family garment business into a diversified, worldwide retail giant, heading Edizione. Both embody the new willingness of Italian entrepreneurs to use technology, media and marketing to address consumers' wishes, as opposed to the Fordist focus on production.

Italy's small businesses have also benefited from this shift in managerial power.

Thanks to the support of small businesses in the northeast, the leadership of Confindustria, the employers' union, is now in the hands of Antonio D’Amato, who fended off a challenge from Carlo Callieri, backed by Agnelli and De Benedetti. Other winners include Tronchetti Provera, the new head of Telecom Italia; Fiat chairman Paolo Fresco and Paolo Cantarella, Fiat's managing director, both of whom oversaw the bid for Italenergia.

But the most striking phenomenon remains the direct takeover of government by the new-style condottieri. Business rules, and Berlusconi is now the high priest of Italian capitalism. During his campaign he styled himself as the Italian economic dream in person and drew support from leading business executives, including Confindustria's active support under D’Amato's leadership. After a long hesitation, Agnelli finally gave his approval. The new managers and shareholders handed Berlusconi his landslide victory.

Berlusconi is the leader of Forza Italia, which won 30% of the vote in the last elections. He also owns the Fininvest conglomerate (8) and the television giant Mediaset, which operates three commercial channels. Berlusconi has enlivened politics thanks to his focus on entrepreneurial efficiency. “Even though I’m interested in politics I still want to continue as a business leader”, he says (9). His successful application of commercial techniques within politics comes from his media titan status as conqueror of the traditional parties and the crisis-prone nation. Vampire Berlusconi has sucked up political power.

Berlusconi personifies the changing face of Italian capitalism. Speaking on behalf of small businesses while embracing their values, he represents the self-made man that so many Italians dream of becoming. But as a native of the Lombardy region (which is in the centre-north), he also symbolises the triumph of the financiers over the Fordist-style capitalists of the northwest Piedmont region.

Italy's capitalists have abandoned invisible handshakes for the media and political saturation favoured by the new business leaders. But the condottieri have maintained their crucial economic leadership role, which allowed the Italian economy to carry on in face of globalisation and European unification.

As Giuseppe Tomasi di Lampedusa, wrote in his novel The Leopard: “If we want everything to remain as it is, it will all have to change.”

Notes

(1) In 2000 Italy ranked 16th, with a per capita gross domestic product of $24,500. Source: OECD in Figures (2001 Edition): Statistics in OECD Member Countries. In October 2001 the unemployment rate among Italy's working-age population stood at 9.3% and 28% among young people.

(2) In Italian, nano (dwarf) rather than renano (Rhineland). Il Corriere della Sera, Milan, 30 July 2001.

(3) Twenty OECD Economic Surveys: Italy, OECD, 2000. Unless otherwise indicated, all statistics cited in this article were obtained from this source.

(4) Over the last two years new businesses have been created at a quicker pace in Italy's south than they have in the country's central region. Moreover unemployment has finally fallen below 20% of the working-age population. The value of exports has jumped by 27.3% as against the national average of 16.5%. Source: Censis Research Centre for Social Studies and Policies, Annual Report 2001, Rome.

(5) Italy's debt levels were largely unaffected by privatisation: the country's debt-to-GDP ratio has exceeded 100% for the last 10 years. This is a far cry from the 60% requirement set out in the Maastricht treaty.

(6) In 1975 shares represented only 1.7% of households' financial assets; in 1999 holdings in mutual funds and shares accounted for some 50% of this total.

(7) The Privatisations in Italy since 1992, R & S Mediobanca, Milan, October 2000. According to the same study the stock market's total capitalisation as expressed in terms of GDP jumped from 12.7% in 1990 to 65.2% in 1999.

(8) In 2000 Fininvest posted earnings of 4.3bn euros ($3.76bn) and profits of 300m euros ($262.8m).

(9) Eugène Saccamano, Berlusconi: le dossier vérité, Éditions no 1, Paris, 1994.