Survival of the fittest in Italy
It’s not long into a chat with an Italian businessmen before talk turns to how a costly state is sucking the air out of Europe‘s third-largest economy, endangering the euro along the way.
“In the end we’re asking for only one thing: a normal government for a normal country,” said Maurizio Marchesini, the president of Confindustria, Italy‘s main employers’ association, in the wealthy north-central region of Emilia-Romagna.
Emilia-Romagna, of which Bologna is the capital, is doing better than much of Italy. It is one of the top 10 industrial regions of Europe, home to companies such as Ferrari and pasta giant Barilla, and seems to be largely free of organised crime.
Clusters of mainly medium-sized firms in engineering, packaging, food processing and ceramics are a reminder that, despite a government debt burden hovering at 120 per cent of annual output, Italy is Europe‘s second-largest manufacturer.
Yet all is not well. Italy is in recession and few expect growth to resume before 2014. Exporters are coping, sometimes flourishing, but many firms that depend on the domestic market are floundering, even in defensive sectors such as food, said Giampiero Bergami, a banker for Unicredit.
Sales and profitability are under assault. “Gloomy would be putting it mildly. We are witnessing a constant contraction of both top lines and margins,” Bergami said.
Household consumption is at a post-war low, depressed by tax rises and spending cuts that Prime Minister Mario Monti, a technocrat, has forced through to rein in Rome‘s budget deficit.
Entrepreneurs respect Monti, who has said he would be willing to stay on if elections next spring produced a deadlock. But if businessmen are doing well, they say this is in spite of the state, not thanks to it.
Marchesini, who runs a successful packaging firm, lists his complaints. The inflexible labour market is “quite impossible for a foreigner to understand”; red tape is so bad it takes at least a year to open a factory; and then there are punishing taxes, poor infrastructure and the high cost of credit.
Confindustria estimates the political malaise is responsible for two percentage points of the risk premium of more than 3.2 points over German debt that investors demand to hold 10-year Italian bonds, which yield 4.8 per cent.
Because government bond yields set the benchmark for corporate borrowing costs, Marchesini is paying interest of four to five per cent despite rising turnover and a good credit rating. That puts him at a big disadvantage to his German competitors.
“So you can imagine it’s hard to make big investments. Of course I haven’t stopped investing in development and new machinery. But, for example, to buy a new building is a real problem,” he said. “It’s very difficult to obtain a mortgage.”
Government borrowing costs have also become an indicator of the wider eurozone crisis. At the moment, attention is focused on Spain and Greece, but if Italy does not show soon that it is getting to grips with its problems, the country could be next in line to shake the 17-nation currency union.
For Eraldo Poletto, the outgoing managing director of Furla, a family-owned maker of luxury leather goods based in Bologna, ever-changing laws, bureaucracy and high taxes are undermining what he says is an old entrepreneurial spirit in Italy.
Carmaker Fiat has frozen a multi-billion-euro investment plan in Italy because of poor market conditions and competition from low-cost production outside Europe, while Alcoa Inc is shutting its Italian aluminium smelter in Sardinia largely due to high energy costs.
Energy is also one of the problems facing the ceramic tiles sector, which has struggled to recover from a slump in 2008. It costs 50 per cent more than the European average, especially for industrial users, because of limited competition, according to the International Monetary Fund.
Italy’s economy has barely expanded in a decade, and Morgan Stanley reckons its potential growth – the rate at which output can rise consistently without generating inflation – may be now just 0.5 per cent a year. Only Greece, the bank noted, scores worse among mature economies on a range of World Bank indicators assessing the ease of doing business.
Blaming politics sounds like a lazy excuse for this abysmal performance, but Stefano Zamagni, an economics professor at the University of Bologna, said the political system truly was at the heart of Italy’s economic problems. After a decade of carefree government spending in the 1980s, Italy needed restraint and reform: a crumbling of the post-war political order in 1992 led to the emergence of parties based on individuals, notably three-times prime minister Silvio Berlusconi, rather than by ideology.
Since then, Zamagni said, Italy had suffered increasing rent-seeking – the term for how groups use their clout for economic gain without benefiting society.
Zamagni estimates total rents at a third of annual output, eating into wages and profits, and sapping the economy. “When rents are high, salaries are lower than they should be; hence effective demand is lower. And unless you increase the profit share, then of course companies will not invest,” he said.
Zamagni believed Italians were getting fed up. Italy was approaching the “bottom of the curve” as voters realised they shared the blame for Italy‘s woes.