Berlusconi or populists? Businesses jittery ahead of Italy elections

Italy is enjoying a recovery after years of financial crisis. But as Italians go to the polls, family-owned businesses, a cornerstone of the economy, are worried about the outcome.
Look who’s back.

“I want the party that will give me civility, not just tax breaks, to win,” says Daniele Lago, the head of a high-end furniture company in Italy ahead of the country's elections on Sunday.

Since Mr. Lago — the youngest of 10 children — joined his family's firm two decades ago, Italy has had 10 prime ministers. “I’d rather not have an election again in the first place,” he shrugs. “It causes unnecessary instability.” That's not something Lago Design is used to — it was founded by Mr. Lago’s great-grandfather in Venice in the 19th century, and has grown into a successful, if little-known, business. Mr. Lago says his worst fear is that right- or left-wing populists will gain power.

While the euro zone’s third-largest country was mired in political uncertainty and economic stagnation, Lago Design transformed itself radically under the leadership of Mr. Lago and two of his siblings. It no longer builds cabinets for local churches and instead makes sleek furniture that “talks” to people thanks to chips that can connect to smartphones via an app. The firm now has a turnover of €30 million ($37 million) and a presence from Rome to Berlin and London.

The company has moved its headquarters to Castelfranco Veneto, a small industrial city near Venice. Away from the elegant old town dominated by a moated medieval ruin, the outskirts of Castelfranco are a sprawling maze of nondescript warehouses and office buildings where small companies like Lago Design innovate and thrive. They make consumer goods, chemicals, car parts or foodstuffs. In fact, northern Italy is dotted with wealthy, industrious towns just like Castelfranco. Mr. Lago refers to the way those thousands of companies work together as "cross-pollination."

The comparison with the Mittelstand is very apt. Jörg Buck, chairman, the German-Italian chamber of commerce

To the casual observer who has seen up close small-town Germany’s dense network of small and medium-sized businesses, the so-called Mittelstand that forms the backbone of Germany's economy, there is an air of déjà vu.

“The comparison with the Mittelstand is very apt,” says Jörg Buck, the head of the German-Italian chamber of commerce, or AHK Italy. “The structures are quite similar in both countries, as is the entrepreneurial culture.” As in Germany, it’s these hidden champions that drive much of the technological innovation happening in Italy.

The country was hit hard by the financial crisis, which sent unemployment soaring above 11 percent and public debt to towering heights. But while successive multibillion euro bailouts of ailing banks and the refugee crisis unfolding off its long Mediterranean coast grabbed headlines, there have been green shoots of recovery, too. Annual GDP growth hit 1.4 percent in 2017 and is predicted to increase to 1.5 percent this year. Although this is decidedly sluggish compared to the rest of the European Union, that’s the best Italy has seen in eight years.

And there’s more. Last year, trade between Germany and Italy grew by 6 percent to a historic level of €121.3 billion. This means the Mediterranean country has a shot at overtaking Britain as Germany’s fifth-biggest trade partner in 2018, Mr. Buck reckons. He points out that Italy is one of the biggest industrial nations in Europe, second only to Germany, and is one of the few countries that have reduced its trade deficit with Germany, the champion of trade surpluses.

02 Looking good, Italy-01

In addition, Rome has adopted policies aiming at streamlining its notoriously unstable government and has boosted investment in digital infrastructure. In 2016, Italian Diego Piacentini, Amazon’s most senior executive after CEO Jeff Bezos, took a two-year sabbatical from the e-commerce behemoth to help the Italian government catapult the country into the 21st century.

So amid this growing strength and policy developments, it’s not surprising that entrepreneurs are positively brimming with optimism. Nearly three-quarters of German companies present in Italy said they expected business to improve in the next 12 months, according to a recent survey by AHK Italy.

As the election looms, however, political uncertainty is by far the chief worry, with 47 percent of respondents citing it as the main risk their company faced. The vote will see the incumbent Democratic Party, led by former Prime Minister Matteo Renzi, take on a resurgent right comprising a partnership between the Forza Italia party of Silvio Berlusconi, another former premier, and the far-right, eurosceptic League party. Challenging both will be the Five Star movement, a left-leaning populist group. With no party or group looking like it will secure a majority, some kind of coalition is a near certainty.

Yet if businesses could vote, it is not a stretch to believe they would comfortably re-elect incumbent center-left Democratic Party Prime Minister Paolo Gentiloni. “The current government is one of the best Italy has had in the last 20 years,” says Alfonso Gambardella, who leads the department of Management and Technology at Milan’s Bocconi University. It does not take much pressing to get Mr. Buck or Mr. Lago to express similar views.

Daniele Lago says the “Made in Italy” label is one of the most powerful in the world.

But other voter groups do not seem as inclined to reward Mr. Gentiloni. His party is trailing the right-wing coalition and is roughly tying with Five Star.

Immigration has been a key topic of the election campaign. As the refugee question dominated debates, the right-wing parties promised to crack down on immigration and deport half a million failed asylum seekers — although they didn’t say how.

But even the 119,000 arrivals by sea from Africa last year are dwarfed by Italy’s enduring problems. With unemployment remaining stubbornly high and millions of university graduates and young professionals forced to live with their parents well into their thirties or else emigrate, many voters distrust their institutions and are tempted to cast their ballots for the populists.

All political parties, including Mr. Gentiloni’s Democrats, are outdoing each other with promises of tax cuts and higher benefits. But once again, the proposals are thin on detail. And with public debt currently at 132 percent of GDP, they do not have much budgetary wiggle room. “They should look into consolidating public finances instead,” Mr. Buck says.

Polls hint that although Mr. Berlusconi’s right-wing coalition will win, it will not get an outright majority. Besides, most analysts believe his alliance with the far-right is not politically viable. As Germany hopes to finally get a government some six months after the last election, another major EU economy contemplates political stalemate. In the worst case, this could benefit the populists.

Months of energy-sapping deadlock and futile politicking, just as things were beginning to look good, is the last thing Italy needs. “If we could just turn the key on, Italy today would be one of the fastest-growing economies,” says Mr. Gambardella, the university professor. Pressed to reveal what that key may be, he acknowledges that there’s no easy answer.

But Mr. Lago, who admittedly is not running for office, readily offers a down-to-earth answer. “The ‘Made in Italy’ label is one of the most powerful brands in the world,” the entrepreneur says. “We need to find our internal drive again. We need to start dreaming again.”

Jean-Michel Hauteville, an editor with Handelsblatt Global in Berlin, traveled to northern Italy in February. To contact the author: [email protected].