4652708_d5ae7de1.jpgEconomy Elections & Institutions 

Sergio Marchionne on the European Project

With the U.S. elections looming and the prospect of Britain leaving the European Union, the transatlantic relationship faces an uncertain future. David A. Andelman, editor emeritus of World Policy Journal, sat down with Sergio Marchionne, CEO of Fiat Chrysler Automobiles and of Ferrari, at the workshop in Venice of the Council for the United States and Italy, which Marchionne chairs, to talk about the consequences of a potential Brexit for international trade and European integration.

DAVID A. ANDELMAN: Let’s start talking about Brexit. More forces seem to be driving Europe apart than holding them together. How did that happen?

SERGIO MARCHIONNE:  This class of the unprotected has been created, which has come about from the exercise of power by the protected over the unprotected in a way that does not make the former accountable. We’re going to have to make Europe as an institution accountable to Europeans. And I think we’ve somehow lost the interface. I don’t know whether we ever had it, but certainly we don’t have it now. What’s pulling Europe apart is a lack of intimacy between the so-called ruling class of Europe and the people who are suffering the consequences of the decision-making. That needs to be reconnected. If it doesn’t get reconnected, then people are going to question the wisdom of belonging to a club in which they have no say in the rules. The ruling class appears to be acting in an absolutely arbitrary fashion, imposing fundamental decisions about the way we live across Europe. That to me is a concerning thing. I am a firm believer in the European project, so while I may be a skeptic in terms of what I’ve seen as application, I’m not a skeptic in terms of the direction of the project. I recognize the benefit of the euro and what is done in terms of providing financial stability for particular member countries. Italy is probably the biggest beneficiary of this, in addition to Portugal and Greece. These are big pluses, as is our environmental policy that effectively sets standards for application across Europe.

But these are benefits that have been in place for a while, so people have assumed them away and are willing to live with the downside risk of those things not being there. The upside of the reacquired freedom from the machine is alluring—it says you can control your own levers again, you can make your own choices, you’re not subject to what may appear to some to be unjustified rule-making divorced from what happens in real life.

DAA: But that’s the concern—that’s what would drive Britain and other countries out of the EU.

SM: That’s my biggest fear—as much as I despise the idea of the U.K. leaving the EU, I think it may be the beginning of a process. I was listening to the Finnish governor of the central bank. No doubt he’s a smart guy. But the problem is that you’re saying, God forbid that it happens, but if it happens we have to seize it as an opportunity to try and rebuild Europe. That’s one way of looking at it. You heard Wolfgang Schauble’s comments about the fact that we shouldn’t be taking the Brexit option as justification for a higher level of integration than what we have now. The Finns’ arguments are not shared across Europe, and I’m not sure if they have enough muscle to get that done. If we don’t use it to bring about a higher level of integration I think there’s a further danger of disintegration of the process. Certainly we’re going to have dislocation in the financial markets when it happens. You’ll see the reaction spread, moving to reflect a heightened level of risk among people who may consider it to come out of the euro. It’s going to put Germany in a very awkward position of having, the minute the borrowing costs skyrocket for countries like Italy, the benefit of the European Union in terms of price stability disappear.

DAA: Either way, aren’t other European leaders—Hollande in France for instance, as well as Hungary and some of the other smaller countries—going to feel a need to hold some kind of a referendum of their own, really beginning a process that unleashes these centripetal forces, if you will, in Europe.

SM: There’s not a doubt that I think the notion of accountability of national governments to the national electorate is going to skyrocket, because they now have a real-life example. The U.K. example is so publicized. They almost rejected the last version of the European constitution. But this one here is not going to go away, I think because it would entail the actual exit of a country from the union. The other cases were just a rejection of a document. Additionally, the U.K. is a major economy. I think it’s a very bad sign for the rest of Europe.

DAA: Take the auto industry. How is this referendum going to affect the auto industry, either way it goes?

SM: Regarding all attempts at reestablishing the validity of national borders that prevent free trade, the consequence of this is going to be clear because once you start exiting the area you will not have access to the so-called free movement of goods and services. If you can’t provide that, I think we’re going to reinstall all the trade barriers and they’re going to be used as competitive weapons. If you happen to have large production assets in the wrong jurisdiction, you will suffer the very negative consequences of that.

DAA: That’s what Donald Trump wants to do in the United States.

SM: Trump is playing the national card. Even if he just focuses on Mexico and Canada, as limited as that is in terms of NAFTA, it has implications for how we produce cars, where we produce them, and so on.

DAA: And it’s going to affect the transatlantic relationship.

SM: It will by far. If that gets threatened then I think TTIP is dead in the water.

DAA: So if Britain leaves, then there’s going to be a whole series of negotiations of trade pacts all over the world. And if Trump gets in he’s going to want to break up all these agreements. You’re going to have all these competing series of trade negotiations, they are going to escalate, and it’s going to be chaos.

SM: You’re going to have bilateral agreements all over the place. And then those bilateral agreements are going to be competitive weapons used by one country against the other—as has been the history here. One of the benefits of the European Union is that it eliminated all that. Suddenly there was a level playing field, a big level playing field. Now it includes over 400 million people, but we’re going to go back in history.

Seventy-plus years ago it was a different Europe, and so for us to step back and expect 70 years to make such monumental change in relationships may have been one step too far. I sincerely hope I’m wrong. If the Brexit issue is overcome, if Britain decides to stay in, I think it will be a reinforcement. I think you need to look at the positive side of this: If they decide to stay in, and I hope they do, it will be a big boost to the European Union and to the argument for its existence, because it’ll say rational people ultimately have chosen to stay.

DAA: So you think the very fact of this vote taking place will not necessarily begin a snowballing process across Europe?

SM: One way or the other, if they stay in it will be a huge boost to the European project.

DAA: One thing that you touched on a while ago was the question of growth and income disparity. The question is whether or not a united Europe has been able to address these issues adequately, particularly income disparity.

SM: It has not. There is this hybrid system, and I think Mario Monti has tried to deal with this, but he tried to deal with it as an economist, which is an incredibly theoretical approach. I think this whole question of tax harmonization being a key ingredient in bringing about social equality, or at least access to a common welfare system, is flawed. That won’t do it. I told him the other day that we have never done anything that was designed to effectively create industrial realities that are totally connected to tax arbitrage within the European Union. We have large positions in Europe, in Italy, as production assets. We have not delocalized those assets because of the fact that we could have had a better tax position somewhere else. We stayed, and I think there’s still a lot of historical attachment to national environments, if ever we preclude the tax hard bargain from happening. If we believe in the European project we know ultimately that’s an issue that will go away.

The problem is that the issue of income disparity is broader than the European project. In the United States, income disparity has become as big of an issue as it is here. Here, we try and hang on the sort of national vs. European structure as being the cause of that problem. The reality is that it isn’t. We need to redefine, and I hate to use the term inclusive capitalism, but we need to redefine the rules of engagement of capitalism. It really needs to change. We have positions now where, as a result of the way in which the capital markets function, we actually reward—with little downside—penalty risk-taking with a large payoff. Now more people are starting to want a piece of this. You need to expand the reach of distributional profits. I think we need to redefine this, and I’m not trying to sound like a socialist. The real issue is that hundreds of thousands of people cannot be the victims of the process. This notion about the unprotected extends to corporate governance as well. It’s not just a question for the politicians. We need to re-moralize the rule-making class. We must do this in the corporate governance environment, resetting the standard because so much has changed. The problem we have is a very old capitalist system that is now associated with an incredibly evolved and efficient capital markets world. The capital system still goes back to the limited corporation in the 1800s. If you look at the development of corporate law and what it’s done, there has not been much. And yet the capital markets have grown at the speed of light. And now there’s this mismatch that’s causing corporations to try and react to a world that they’re not a part of. We need to change this.

DAA: Governments in some respects are in a similar situation. We’ve had this campaign now in the U.S. that’s just extremely bizarre. France is about the embark on its own presidential campaign, and France seems to be moving to the right while other European countries also seem to be moving toward the right. Where do you think transatlantic relations are heading right now, and what do you hope and fear?

SM: When you go down the decision tree it’s subject to so many cutoff points. It depends on what happens with Brexit, it depends what happens in Europe, it depends what happens in the U.S. There are too many variables.

DAA: Terrorism.

SM: Terrorism. All of this is on the table. It’s perhaps wishful thinking on my part, but regarding this whole question of opening it up and making the world flatter than it is, I think when you stand back and objectively look at the benefit of trade I think it’s been positive right across.

I like the notion of a flat world. It makes my job a lot easier—it’s a very selfish thing. And I actually think that economically people reap incredible benefits from the flattening of the world. Whichever way, Americans are going to make their decision based on a variety of factors, and trade is one of the items they’ll look at. But I think trying to peg these leadership evaluations on the basis of pure trade is going to fail.

DAA: How are you going to make Ferrari number one again?

SM: By going back to what has made Ferrari great. On the passenger car side, we have moved the edges of the envelope continuously and we have somehow lost our way on the F1 side, and we have lost our ability to define the excellence of performance. We lost that somewhere between the pits and on the way back to Maranello. The kids at Maranello are working hard to try and get there. It is not linear travel, as you saw from the race in Canada, and while we’re racing now on the circuit in Baku today, tomorrow it’s a new circuit. It’s going to test the car again and the conditions have changed. One of the things that we’ve noticed is that our aerodynamics are not as adaptable as the French and the Renault and the Germans. We need to fix this because we’re losing. We need to reset the clocks every time we get into the circuit in a way that is unnatural.

DAA: Is it the car or is it the driver?

SM: In all honesty, and this is not to take away from Kimi Räikkönen, but we have seen in Sebastian Vettel an exhibition of driving skills that is unique in the world. The way he took off in Montreal, the way he’s taking off in Australia, his execution on the track is nearly flawless and so I can’t ask for more. I have the driver—I have both drivers. They’re both world champions, so let’s not blame the drivers. That’s not to take away from their responsibility, but we need to give them the tools that will make them win. It’s our fault, not theirs. The work started when I came in last year. We started redesigning. It’s almost up to snuff—we’re within walking distance of being able to match Mercedes.

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This interview has been edited and condensed for clarity.

[Photo courtesy of  Ian S.]

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