Europe’s Second Largest Industrial Base Sinks Under the Weight of Energy Costs as Divisions Open Up in the Ruling Coalition

Italian Prime Minister Giorgia Meloni recently celebrated a range of energy deals with Algeria. The agreements are part of Rome’s efforts to make up for energy shortfalls due to European sanctions on Russia and transform Italy into a Mediterranean energy hub.

While the deals were touted by government officials, in reality they do little for Italy’s near-term energy outlook, which is dire (more on that later). The public is growing increasingly wary of Rome’s support for Kiev, and last week former prime minister and leader of one of the parties in Meloni’s coalition government, Silvio Berlusconi, set off a firestorm with his mild suggestion that maybe, just maybe, this whole NATO proxy war against Russia is a complete catastrophe that deserves some more critical thought. 

“If I were prime minister, I would never go talk to Zelenskyy,” Berlusconi said, adding, “We are assisting in the destruction of his country, the killing of his soldiers and civilians. All that was needed was for him to stop attacking the two autonomous republics in the Donbas, and this would never have happened.” 

He also urged Washington to pressure Zelensky into a ceasefire by cutting off the supply of NATO weapons. 

Cue the meltdown. Italian politicians and media attacked Berlusconi. Meloni quickly declared her unwavering support for Ukraine, NATO, and the US. According to Politico,  conservative “politicians from nine countries criticized the comments and several said they planned to boycott an upcoming gathering of conservatives in Naples, Italy, if Berlusconi attended.” 

The likely reason for the apoplectic response from officials and the media across the EU is that any signs of dissension threaten to bring down the entire house of cards. Indeed, Berlusconi was only voicing what the Italian (and much of the EU) public is thinking. 

A recent Ipsos survey shows that only 30 percent of Italians are in favor of sending military supplies to Ukraine (compared to 48 percent of Germans, 63 percent of the British, 54 percent of Americans, and 52 percent of the French). Only 42 percent of Italians support sanctions, and 63 percent think that due to the crisis in their country, they cannot afford to financially support Ukraine. 

One need not look further than the toll the lack of Russian energy is having on the Italian economy to understand why public support for the NATO adventure in Ukraine continues to wane. 

Italian manufacturing contracted for a sixth month running in December as firms began self-rationing over the summer. It’s often forgotten that Italy is the EU’s second largest industrial base behind only Germany. 

Similarly, Italy is the second largest importer of natural gas in the EU behind Germany. Italy’s industrial lobby group Confindustria sums up the situation:

The Italian economy is still slowing down: energy costs are persistent and inflation is at record levels. Furthermore, with the rise in interest rates and the lower liquidity due to energy bills, Italian companies risk getting into debt at high costs. 

​​Italy relies on imports for three-quarters of its power consumption and Rome already has had to commit roughly 100 billion euros to soften the blow of the energy crisis, which has meant cuts to social programs.

Italy is looking south across the Mediterranean as part of the EU-wide turn to Africa in search of energy replacements for Russian oil and gas. The problem for Europe as a whole is the numbers just don’t add up. From GIS: 

The entire African continent’s proven gas reserves are equivalent to 34 percent of Russian resources, and North Africa’s reserves equal only 10 percent of Russia’s. The African and North African gas production is 36 percent and 15 percent of Russia’s output, respectively. In 2020, total gas trade between Europe and Russia was nearly 185 bcm, about four and a half fold the trade with North Africa.

And for Italy more specifically, the only way it can fully replace Russian gas is through significant demand side measures, according to Marco Giuli, a researcher at the Brussels School of Governance in Belgium. From Hellenic Shipping News: 

Italy consumed 29 billion cubic metres (bcm) of Russian gas last year, representing about 40% of its imports. It is gradually replacing around 10.5 bcm of that by increased imports from other countries starting from this winter, according to Eni.

Most of the extra gas will come from Algeria, which said on Sept. 21 it would increase total deliveries to Italy by nearly 20% to 25.2 bcm this year. This means it will become Italy’s top supplier, provide roughly 35% of imports; Russia’s share has meanwhile dropped to very low levels, Descalzi said this week.

From the spring of 2023, an increasing flow of LNG will start to arrive from countries including Egypt, Qatar, Congo, Nigeria and Angola, allowing Italy to replace another 4 bcm of Russian gas, Eni said.

I’m not great at math, but if you lose 29 bcm and replace it with 14.5 bcm, that’s suboptimal. And even that is a best-case scenario. More from Natural Gas Intelligence: 

To reduce dependency on Russian gas supplies following the invasion of Ukraine as others across Europe are doing, Algeria’s Sonatrach and Eni agreed to a supply deal in April. Algeria would deliver an additional 9 Bcm of gas in 2023 and 2024 via the Transmed Pipeline.

But the Transmed system connecting Algeria and Italy is not operating at full capacity. Algeria has had production issues. The country has not invested in new infrastructure to increase production in the past three decades, and it needs to divert gas to meet increasing domestic demand for electricity. 

“The additional 9 Bcm from Algeria by 2023 is unrealistic, especially considering that Algerian supplies to Italy increased by 80% between 2020 and 2021, Giuli said.

Giuli said a large increase by 2023 can only occur if there is a diversion of flows from Spain to Italy. Algeria’s relations with Spain have been strained because Spain has sided with Morocco over a land conflict in the Western Sahara.

During a Meloni trip to Algiers in January, Italy and Algeria signed agreements, including for the study and construction of an additional pipeline, as well as an underseas power cable, but those are years away.  

In return, Italy’s industrial lobby group Confindustria pledged more activity in Algeria, and the Italian Space Agency agreed to share knowledge and develop joint projects. The Confindustria agreement could mean more Italian industrial production taking place across the Mediterranean. The Fiat brand of Italian automaker Stellantis is already getting auto and motorcycle production up and running in Algeria. 

Meloni has little choice but to follow such policies despite the journey being all but doomed from the start. Italy’s economy and foreign policy are controlled by the EU and NATO, respectively, and as EU Commission President Ursula “the Great” said ahead of Meloni’s election victory, the EU has the tools to punish Italy should it get out of line. 

This was the energy path laid out by her predecessor Mario Draghi.  The former European Central Bank president and Goldman Sachs vulture, Draghi was one of the biggest proponents of the EU’s doomed Russia policy. He helped lead the charge for energy sanctions and wanted to steer Italy towards north Africa in its search for replacements. 

Maybe it’s his final nail in the coffin of his native country. Draghi has been one of the primary authors of the neoliberal playbook guiding Italy for the past quarter century, and everything he’s touched has turned to sand. Thomas Fazi writes at Unherd:

It’s no coincidence that the era of the technical governments begins in the early 1990s, following Italy’s signing of the Maastricht Treaty, which was negotiated by none other than — you guessed it — Mario Draghi, at the time director general of the Italian Treasury. The first technocrat-led government, led by former governor of Italy’s central bank, Carlo Azeglio Ciampi, was formed in 1993 and inaugurated the first round of mass privatisation of state assets. Just a few years later, it was the turn of Lamberto Dini, prime minister between 1995 and 1996.

Throughout this entire period, Draghi, in his capacity as director general of the Treasury, was one of the main proponents of the privatisation of Italy’s state-owned companies, and of the vincolo esterno in general. The fall of Berlusconi’s last cabinet, in 2011, saw the ushering in of another technocrat, Mario Monti, former European commissioner and an international advisor to Goldman, who proceeded to administer a devastating austerity “cure” recommended by Brussels. This was largely a consequence of the decision by the newly-appointed president of the ECB – yes, Mario Draghi again – to stop the purchases of Italian government bonds, which caused Italian interest rates to skyrocket.

Draghi laid out his vision for Italy in a 2011 screed when he was president of the ECB. It included: 

•  The full liberalization of local public services and professional services, through large-scale privatizations; 
•  Further reform the system of collective wage bargaining, allowing firm-level agreements to tailor wages and working conditions to the specific needs of firms;
• A thorough review of the rules governing the hiring and dismissal of employees 
•  Further intervene in the pension system, tightening eligibility criteria for old-age pensions and bringing the retirement age of women in the private sector rapidly back in line with that established for the public sector;  to evaluate a significant reduction in public employment costs, by reducing wages.

He was able to accomplish some of that during his time as unelected prime minister from February 2021 to October 2022. Draghi laid the groundwork for privatizing local public services by changing the role of Italian municipalities and transferring power from elected officials to bureaucrats at the Italian Competition Authority (ICA).

The ICA will also be granted oversight of privatization efforts. Municipalities will be required to submit reports to the ICA justifying why certain services are better served by remaining run by the state, and there will be periodic reviews of these reasons, as well as increased cost-monitoring.

The stated goal is to eliminate red tape “affecting the freedom of economic initiative.” Critics believe that cash-strapped municipalities will continue to have a hard time providing adequate services, which will then be privatized.The Ministry of Infrastructure and Sustainable Mobility will also begin to exercise powers over regions if they have not “removed obstacles to the entry of new operators.”

He managed to ensure that Italian real wages are falling at the fastest pace in the EU, and it remains the only country in the bloc where wages have fallen since 1990. Temporary, low-paid contracts now account for the majority of new jobs and 5.6 million Italians — including 1.4 million minors — currently live in poverty, an all-time high.

He was a leading proponent of cutting off Europe from Russian gas, helping make sure that inflation is driving down households’ real purchasing power, business and consumer sentiment is plummeting, and the ECB is now trying to kill that inflation by hiking interest rates, increasing Italy’s funding costs and the likelihood that Rome will need assistance. 

And then the Eurocrats can get to work fulfilling Draghi’s vision for Italy.