When he took over from Silvio Berlusconi as Italian prime minister earlier this year, Romano Prodi could credibly paint himself as the brave reformer of Italy’s moribund economy.

An economist by training and a former president of the European Commission, Prodi appeared to acknowledge the changes needed if Italy was to adapt to the demands of a single currency.

Now Prodi has become embroiled in a row with Marco Tronchetti Provera, who resigned as chairman of Telecom Italia SpA last week after Prodi objected to plans to split up or sell the company’s wireless operations. Tronchetti Provera remains chairman of Pirelli & C. SpA, the largest investor in the holding company that owns 18 percent of Telecom Italia.

The country will ultimately be the loser from such political interference in corporate decisions — and the euro area will suffer as well. Prodi has dashed hopes of serious change in Italy. Its exit from the euro has never looked more likely.

“What happens in Italy is crucial to the euro area, because of its political and economic significance,” Simon Tilford, head of the business unit at the Centre for European Reform in London, said in a telephone interview. “The cyclical pickup in the European economy has probably been the very worst thing that could happen to Italy because it has emboldened the people who are opposed to reform.”

There is certainly plenty of evidence for that in the telecommunications sector.

Telecom Italia is a substantial company in its industry. With a market value of about 41 billion euros ($52 billion), it is similar in size to France Telecom SA, and bigger than the U.K.’s BT Group Plc. You might think Telecom Italia’s strategy and direction should have been left up to Tronchetti Provera and the rest of the company’s management.

`Surprised and Disturbed’

Last week, Tronchetti Provera came up with a plan to refocus the business on providing broadband Internet connections and selling media content. It will create separate companies for the wireless unit and fixed-line access network, possibly including a sale of the mobile-telecommunications division, or bringing in outside investors.

In most countries, Tronchetti Provera’s proposal would have been a small story on the business pages. In Italy, the prime minister gets involved. Prodi said he was “surprised and disturbed” by the plan. Of course, the unions were up in arms.

Tronchetti Provera had no choice but to resign, making way for Guido Rossi, the 75-year-old former head of the Italian stock market regulator. Yet the row wasn’t settled even by the delivery of the chairman’s head on a platter. On Sept. 18, Angelo Rovati, one of Prodi’s chief economic aides, resigned amid stories in the Italian press that the government aimed to bring Telecom Italia’s fixed-line business back under its control.

Two Lessons

Certainly investors could only look on with bemusement. “This suggests an increasingly interventionist government stance,” Merrill Lynch & Co. said in a note to investors.

There are two lessons to learn from Telecom Italia’s experience with Prodi. One is corporate, the other political.

For investors, Telecom Italia now looks like a mess.

Tronchetti Provera’s plan would have struck most outsiders as sensible. Around the world, telecommunications companies have realized that old-style fixed-line businesses will come under increasing pressure. People can make free calls on the Internet, or they can use their mobile phones.

Against that, providing broadband connections is potentially a huge business, and the traditional telecommunications incumbents have the infrastructure that puts them in the best position to provide that service.

Insiders Make Decisions

Ditching the older, lower-growth units and concentrating on the more dynamic businesses can be considered a good strategy for any industry. Telecommunications should be no exception.

Next, whether or not you agreed with Tronchetti Provera’s strategy, it is clear that the chairman and his managers were in a far better position to judge the direction the company should take than the prime minister.

Telecom Italia belongs to one of the fastest-changing, most fluid industries in the world — and one where there will be big prizes for the companies that make the right calls. Decisions must be made by the insiders who know the issues, not by a group of politicians with only a fleeting knowledge of the business.

Tronchetti Provera remains an influence on Telecom Italia as chairman of Pirelli. The stage is set for more infighting and blood-letting, probably the last thing Telecom Italia needs as it tries to build its future.

Euro Exit

Italy should be concentrating on technology-led, high-value industries such as telecommunications as it attempts to transform its economy. Prodi clearly refuses to accept that.

We can forget about reform of Italy’s ossified economy. The new prime minister would rather go back to the old-style deals between government, unions and big business. Yet without genuine moves toward a more flexible, open economy, it is impossible for Italy to remain in the euro.

Only Italy can lose in the battle between Prodi and Tronchetti Provera — and the rest of Europe will suffer as well.

Source- http://quote.bloomberg.com

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