State Capitalism Or Corporatism? Italy’s Carmaker Conundrum

Italy’s iconic car manufacturer, Fiat, announced Saturday its plans to keep its production base in Italy after months of threatening to leave for more business-friendly and less-regulated Eastern European countries. In fact, Fiat has already been offshoring — and its Polish assembly plants are more than three times as productive than their Italian counterparts. CEO Sergio Marchionne has become a prominent figure in Italian media recently, as he has denounced Italy’s poor business environment (the second-worst of all OECD high-income countries) and advocated liberalization reform on numerous occasions. As part of Fiat’s decision to stay, the Italian government agreed to “work together” with Fiat to “strengthen the company’s competitiveness.”

It is unclear what exactly this entails, but if Prime Minister Mario Monti’s administration truly wants to boost the competitiveness of Italian firms, he should begin by revisiting his damp squib labor reform package devised this spring and passed in parliament this summer. Dismissal of poorly performing employees still remains illegal in Italy. And although the reforms now permit layoffs during times of financial distress, employers must prove the economic necessity of the dismissals to a labor judge. As I’ve written in The Wall Street Journal and in the City AM, the Italian judiciary is neither impartial nor efficient. Growing a business and hiring new employees is just too risky in Italy.

Marchionne is set to meet with union leaders in the coming days, who will undoubtedly reject any more changes to the labor code.

Predictions of exactly what kind of assistance Fiat will receive from the government are speculations at this point, but it’s difficult to see any plans for meaningful liberalizations on the table given union resistance and political interests in keeping the regulatory state alive and well. The likely result is state capitalism, à la subsidy. But the best Italians can realistically hope for is some sort of government-brokered deal between Fiat and the unions to bring down Fiat’s labor costs, à la corporatism.