Is Italy running afoul of Margrethe Vestager’s ground rules for a digital Europe?

Since the European Commission brought together a historic €750 billion financial recovery package to invest the European Union’s way out of the economic crisis brought on by Covid-19, key Commission leaders including Commission President Ursula von der Leyen and Vice President Margrethe Vestager (who is responsible for both the EU’s digital transition and for competition issues) have made it quite clear in what direction they want the “Next Generation EU” funds made available to the European Union’s 27 member states to go.

President von der Leyen laid out in her September “State of the European Union” speech a vision of a “twin green and digital transition” and of the 2020s as “Europe’s Digital Decade,” with the bloc formulating common goals for connectivity, digital skills, and effective digital governance over the next ten years. Vice President Vestager, for her part, has sought to ensure the state aid measures deployed by Europe’s member states to weather the brunt of the crisis remained “temporary, limited and designed to protect from bankruptcies and layoffs,” while also ensuring the framework of the EU-wide economic recovery reduced distortions in the European single market.

Unfortunately, some key EU countries seem to be willfully ignoring that message. For Vice President Vestager, the most pressing challenge to her guidance comes from Italy, where the government is attempting to reverse decades of progress in telecoms liberalization by pushing through a new monopoly combining the formerly state-owned Telecom Italia (TIM) and Open Fiber, a joint venture created by the Italian state lender Cassa Depositi e Prestiti (CDP) and energy giant Enel. If successful, the resulting company would have a monopoly over Italy’s fixed broadband network, hurt consumers while also raising potential conflicts of interest alongside fears of state aid.

TIM and Open Fiber: a match made in infamy

For advocates of open and competitive telecoms markets in Europe, Margrethe Vestager foremost among them, the Italian government’s rationale for throwing its weight behind a merger is at best misguided and at worst regressive. Whereas Rome claims its plans to create a “national champion” will help close the country’s considerable digital divide with the rest of Europe, competition between TIM and Open Fiber is the main reason why Italy has made any progress in fiber to the home (FTTH) broadband deployment at all.

Despite claims from TIM that Open Fiber’s wholesale-only business model has been “a failure,” the upstart company has connected 8.5 million Italian households to its FTTH network, enough to make Open Fiber the third-largest supplier in Europe and to make up considerable ground for the country’s lagging digital infrastructure.

According to the European Union’s Digital Economy and Society Index (DESI), which ranks Italy fourth-to-last among EU countries in terms of overall digital advancement, the country has nonetheless advanced from 25th place for connectivity in 2017 to 17th in 2020. Thanks in no small part to Open Fiber, the country’s DESI score reflecting its take-up of fixed broadband has tripled over that span.

TIM, on the other hand, has earned a reputation for being unhelpful to Italy’s digital progress. Just this past March, Italy’s own antitrust authority fined the former monopoly €116 million for what it called a “premeditated anti-competition strategy’ to keep its market rivals from investing in the ultra-fast broadband networks Italy sorely needs to keep pace with the rest of Europe.

That fine, the result of a three-year investigation, resulted from a bait-and-switch over broadband deployment in “uneconomic” areas, in which TIM initially declined to rollout broadband services in regions where it couldn’t make good on its investments. After the Italian government had to make up for the shortfall with state-subsidized tenders, TIM changed its mind – but only after losing the first of those tenders to Open Fiber.

Open questions for Vice President Vestager

As Margrethe Vestager’s office takes up the question of a TIM-Open Fiber merger, it will have to parse through an Italian government position that does not appear to address the fundamental issues with the plan.

The primary concern for Vice President Vestager, of course, is the fact that the TIM-Open Fiber tie-up would create a de facto monopoly backed by the state, undermining the EU-wide drive towards deregulation and liberalization. On the Telecom Italia side, CEO Luigi Gubitosi has insisted his firm would keep control over the broadband network in the event it becomes the country’s sole wholesale provider.

While it’s unclear at this stage whether the deal will be scrutinized by Brussels or Rome, there are serious state aid questions involved. Even though Giuseppe Conte’s government has promised it would create a “monitoring trustee” to ensure oversight of the prospective broadband monopoly’s behavior towards investment decisions and the market, the government itself would be the second-largest shareholder in the firm and would exercise veto power through state agencies like CDP. The monopoly network could even receive grants from the Next Generation EU package.

Ultimately, the danger the Italian plan represents for the EU is its potential to set a harmful precedent for other markets. While the European approach to telecoms has been consistent in its pursuit of liberalization over the past several decades, that has not stopped member states from reverting to interventionist tendencies to make up for perceived shortfalls in the market.

Indeed, since before the current economic crisis, Vice President Vestager has been facing considerable pressure from key member states such as France and Germany to loosen the EU’s competition rules, especially after her move to block the Siemens-Alstom rail merger last year. But by allowing Italy’s plans to move ahead, the European competition authority could severely undermine its own position in future deliberations – opening the door to backsliding that would slow Europe’s digital transition.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes