(Bloomberg) — Emergency, all hands on deck!That was the thrust of a remarkable letter Italian Prime Minister Giuseppe Conte sent to his ministers earlier this week, calling on them to put aside squabbles and come up with “proposals, projects, solutions or specific measures” to rescue a bankrupt steel mill in the southern city of Taranto.Conte’s unusual — some might say desperate — step highlights the pressure on his fragile coalition. The premier is scrambling for a solution to an industrial crisis that’s dominated front pages for weeks while providing fodder for the opposition.Worse still, it was Conte’s own allies who precipitated the crisis in the first place, after they passed a law that prompted ArcelorMittal, the steel giant that had agreed to invest and take over the plant, to change its mind and pull out of the deal.Yet despite an economy that’s been stumbling for decades, Italy’s government has time and again stepped in to bail out ailing companies. What’s different this time is that the Taranto plant has become a life-or-death dilemma for the government.Italy won’t permit the shutdown of the steel mill, according to an emailed statement from Conte Friday. He said ArcelorMittal’s decision is a “clear violation of contractual commitments.”How Did We Get Here?In 1995 Italy sold the Taranto mill, built with public funds in the 1960s, to the Riva family, but it took back control in 2012 after judges ruled the owners were culpable for environmental damage from the plant.After exhaustive negotiations, ArcelorMittal agreed to lease and eventually buy the plant, investing 2.4 billion euros ($2.7 billion) to modernize the facilities and reduce toxic emissions.Under the original agreement, which also included some job cuts, ArcelorMittal was covered by a law shielding managers from criminal charges based on environmental or health-related violations.What Sparked the Current Crisis?Conte’s majority, egged on by some Five Star Movement lawmakers, voted last month to remove the immunity clause, even though ArcelorMittal had said it wouldn’t proceed without that protection. The steelmaker made good on its promise this month, sending an official notice of intention to terminate the deal.Now, Conte is desperate to bring ArcelorMittal back to the table, and daily Il Messaggero reported he’s ready to make concessions — including restoring immunity — in order to entice the Luxembourg-based steelmaker to remain at Taranto.But there’s no sign the company wants to reconsider. Steel demand in the European Union is expected to drop the most since 2012 and prices have hit multi-year lows.Both sides have sued and, if the usual Italian timelines apply, legal battles could drag on for years. For now, state-appointed administrators have until Dec. 4 to take responsibility for the mill’s operations and its employees.Adding urgency to the situation, ArcelorMittal plans to shut down all of the plant’s furnaces by Jan. 15, trade union Fim-Cisl said. In a sign that the issue may be hitting confidence, the spread between Italian 10-year government bonds and their German counterparts widened by as much as 15 basis points Thursday and finished the day at 168 basis points.What’s at Risk for the Government?Nothing short of a full collapse. While the premier managed this summer to stitch together the coalition of Five Star and the center-left Democrats, plus some minor parties, his second cabinet has been no better at burying its differences — particularly over the budget — than its predecessor was.The steel plant has only made things worse. The dilemma over what to do about the mill has exposed deep rifts between the coalition allies and within Five Star, which has strong environmentalist roots.Five Star and the Democrats are at loggerheads over whether to restore immunity, while Five Star leader Luigi Di Maio is fighting an internal battle with party rebels who want the government to stand tough against ArcelorMittal.What Happens Now?The Conte letter suggests that solutions, at least for now, are in short supply. Every option carries a high political cost and the coalition, after less than three months in office, is looking dangerously divided.The Italian media has reported on a number of “Plan B” scenarios for the Taranto plant, including a government-backed solution involving state lender Cassa Depositi e Prestiti SpA and unnamed partners. Some officials have called for wholesale nationalization, but with its badly stretched finances, can Italy afford that?Five Star, still smarting from defeats in other environmental battles, has made ending the noxious emissions from Taranto a core policy goal. And with its poll numbers in a downward spiral, the party has little appetite for compromise. It’s unclear if its lawmakers would back any kind of renewed immunity for ArcelorMittal’s managers.The company is planning to shut all the works at Taranto by Jan. 15. Allowing the plant to close would mean about 20,000 lost jobs. That could spark a ripple effect throughout the country’s underdeveloped south — Five Star’s stronghold.A closure could also shave 0.2% from gross domestic product, a study by the Svimez think tank said. That’s half of Italy’s 2020 growth, according to European Commission forecasts.Waiting in the wings: the opposition led by Matteo Salvini. The head of the rightist League party has been skewering the government for mishandling the plant issue — and his poll numbers are running close to the all-time high reached last summer.(Updates with Conte comment in 6th paragraph.)–With assistance from Elena Mazneva and John Follain.To contact the reporters on this story: Ross Larsen in Rome at [email protected];Alessandro Speciale in Rome at [email protected] contact the editors responsible for this story: Dale Crofts at [email protected], Guy CollinsFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
