Italian Austerity Likely To Hit Aerospace

Aug 9, 2011

By Andy Nativi

GENOA, Italy — Italian defense spending and other public allocations backing aerospace are expected to face a difficult future under Rome’s newly minted fiscal reform package aimed at soothing market fears over its ability to repay its debt.

The effect on the individual ministerial line items has not yet been decided, but the accelerated move to a balanced budget and other reform commitments make cuts to spending on aerospace, defense and security inevitable. The goal of the reform package – which also includes welfare cuts and tax increases that could trigger labor turmoil – is to bring the ratio of public debt to GDP to a more sustainable level.

To raise funding, Rome also may be forced to sell its stake in some industrial “crown jewels.” Even disposal of part of its 30% stake in Finmeccanica is not being ruled out; a potential option is to reduce the involvement to a mere golden share to protect the company from foreign takeover. However, that move is seen as unlikely.

Finmeccanica’s share price has fallen sharply in recent days, owing to a combination of factors including disappointing earnings, slow progress in streamlining the business and broader concerns over the Italian market. Any disposal is unlikely until the share price recovers to make the sale financially attractive.

The increased budget pressure also is expected to hit the ministries of economic development, research and public instruction, and transportation. The first pays for research and development, as well as procurement of many major platforms – including Eurofighter Typhoon fighters, navy Fremm frigates, army wheeled combat vehicles and military satellites. The research and public instruction ministry provides the Italian space agency’s funding resources and the transportation ministry finances the bulk of the coast guard.

The squeeze has been on aerospace for some time. Prior to the latest move, the government cut €5 billion ($7.1 billion) from public spending under the 2012-14 budget plan, with €250 million taken from defense in 2012 and another €413 million in 2013, More cuts in 2014 were planned. The ministry of economic development was to surrender a total of €2 billion, although only a small fraction would have hit aerospace and defense activities. The ministry currently is looking to obligate €400 million to support R&D programs, money which was approved but has not been earmarked.

The defense ministry still has to detail how it will cope with the budget crunch, and a communication on that strategy could be submitted to parliament by the end of September. That deadline may slide if the new spending adjustments have to be built into that plan.

So far, the defense ministry has tried to absorb spending cuts without sacrificing major procurement activities or cutting personnel. However, with operations and maintenance accounts already stretched, curtailing modernization funding may emerge as the ministry’s only tool to decrease spending, especially if there is continuing political pressure not to cut uniformed or civilian personnel.

Operational reductions have been made. In its commitment to the NATO mission against Libya, Italy will replace its aircraft carrier with a smaller amphibious platform (its navy Harriers are no longer in action), while the air force has added the AMX to the F-16s, Typhoons and Tornado it is flying. Those steps will help shrink operational outlays for the full year below the €1.8-2 billion forecast.



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