Italy’s New Government Faces an Old European Dilemma Over Jobs

(Bloomberg) -- Smoke drifts across the ancient harbor in Taranto on Italy’s southern coast as fishermen sort their catch against brickwork stained black by decades of pollution.

Across the bay, the chimneys of Europe’s biggest steel plant dominate the skyline as its furnaces dominate the local economy. On an average day, the plant churns out 13,000 tons of steel and loses about 1 million euros ($1.2 million). Without the 1.8 billion-euro takeover by ArcelorMittal due to be completed June 30, the state-controlled plant will run out of cash by July, threatening the livelihoods of a quarter of the families in this city of 200,000.

It’s places like this where Italy’s populist revolution has been brewing. And Taranto will also be among the first big tests for the new government sworn in last Friday.

Italy’s New Government Faces an Old European Dilemma Over Jobs

The Five Star Movement, one of two groups in the governing coalition, won 48 percent of the vote in Taranto in March’s general election, opposing the ArcelorMittal deal and promising its supporters something better. Now it’s in a position to deliver, the party is under pressure to firm up its plans.

“There is a lot of confusion from their side,” Enzo Cesareo, head of the local industry association, said in a phone interview from Milan Thursday before a meeting with plant managers. “When you are an opposition government you can speak, and scream and denounce. It’s another thing when you are in power.”

The Ilva SpA steel plant is twice the size of Taranto itself and has been under state-supervised special administration since 2015. Output is capped to limit the environmental damage from its substandard machinery and the state backed down from its effort to cut jobs when unions threatened to bring the city to a standstill.

That left the plant with unsustainable costs that meant it was unable to take advantage of a recovery in European demand since the end of the financial crisis.

Italy’s New Government Faces an Old European Dilemma Over Jobs

ArcelorMittal is planning 2.3 billion euros of fresh investment to boost the plant’s safety conditions and curb pollution. But thousands of job cuts are also likely among the workforce of almost 14,000—harsh medicine in a city that’s already seen its share of hardship. Workers are holding out for another state rescue.

“It is time to get something back from the central government,” said Giuseppe Mazzilli, 54, who has worked at the site since 2001. “This does not mean shutting it down, but cleaning it up and starting again. People are dying.”

Taranto has been dying a slow death for years. Its residents have seen incomes fall to barely 60 percent of the national average while regional government says locals face a 29 percent greater risk of heart attacks than the rest of the region and childhood respiratory disease is 24 percent higher.

Italy’s New Government Faces an Old European Dilemma Over Jobs

Until 1965, the city lived off fishing and its naval base. Then the steel plant opened as Italian industry enjoyed a postwar renaissance. Three years later, Taranto was producing 94 percent of pig iron and 51 percent of all the steel in the country, shipping it around the world from the city’s industrial port.

But the oil crisis in the 1970s set off a chain of financial problems that the plant has never really recovered from. In 2012, the plant’s managers were arrested for breaching environmental regulations on emissions. The same year, the Italian government approved a 336 million-euro investment to shore its finances. Those measures still failed to turn the plant around, with unions blocking the prospect of job layoffs. And in 2015 the government took full control.

While ArcelorMittal works to close the deal on June 30, Five Star is stoking up resistance to the plan. Tensions were further inflamed when a 28-year-old worker was killed by a crane in an accident earlier this month.

On May 21, senior Five Star official Lorenzo Fioramonti met unions in Taranto to discuss the workers’ future. The meeting was so hotly anticipated that fights broke out among representatives over who was allowed into the room.

“If there is a different option from the one from ArcelorMittal, we will consider it,” Fioramonti said after the meeting.

Italy’s New Government Faces an Old European Dilemma Over Jobs

Five Star has called for jobs to be protected while the plant’s pollution problems are addressed and says the workers could eventually be absorbed by other local industry, without providing any specifics. Spokespeople for ArcelorMittal and Ilva declined to comment on the prospect that the deal could still fall through.

Unions want the government to step in again and absorb the plant’s losses. That would mean potential fines for breaking the preliminary accord with ArcelorMittal, not to mention the hit on Italy’s precarious public finances and EU scrutiny on state aid. And the state would then be saddled with responsibility for making the facility competitive.

Italy’s New Government Faces an Old European Dilemma Over Jobs

“The Italian government does not have the expertise to tackle the extreme pollution problems,” said Christian Georges, an analyst at Societe Generale in London.

The alternative is another body blow for Five Star’s core voters.

Such are the decisions that governments have to take.

The clock is ticking.

©2018 Bloomberg L.P.