Not so dolce vita: Why Italy is on the skids

Italy is having its worst time since the Second World War. To get the economy motoring again, the new government must get rid of stifling labour laws, improve access to credit and harness the energy of its youth.

by Emma De Vita
Last Updated: 09 Oct 2013

So you thought we had it bad? Well, spare a thought for Italy - its plight puts Britannia's woes into perspective. The eurozone's third-largest economy continues to suffer its longest recession since the Second World War, and its economy will shrink by a further 1.4% this year.

Italy has the eurozone's second-largest public debt after Greece (a record 134.2% of GDP is predicted by the OECD for 2014) and the unemployment rate is set to reach an unprecedented 12.3% next year. Youth unemployment is running at a record 40.5%.

Silvio Berlusconi, the disgraced media mogul who ran the country on and off for nine years until he was ousted in 2011, helped create the economic mire; Mario Monti, the respected technocrat drafted in by the EU to sort it out, could only handle the Herculean task for just over a year; and elections this spring led to yet more chaos and uncertainty.

After a messy and inconclusive election, an unlikely coalition government has brought together the left's Democratic Party, represented by 46-year-old prime minister Enrico Letta, and Berlusconi's party of the centre-right, the People of Freedom.

This tense arrangement hangs on a knife-edge, as Letta must keep Berlusconi sweet - this old rogue could pull the plug and force another election at any time. Although the business community in Italy takes solace from the fact that the political impasse has been resolved, its faith in the Italian political system, rarely high, is now at rock-bottom.

Vincenzo Accurso, MD of Piacenza-based international trading company Mediacomer, confesses that he has zero faith in the current government, 'because a true civic conscience doesn't exist among them, nor do they have the right expertise - parliamentarians are too ignorant'.

This cynicism towards la casta - Italy's discredited political elite - is deep. Nerio Alessandri, CEO of luxury gym equipment and 'wellness' business Technogym, based in Cesena, voices the common opinion that 'we need to change the political culture. Politicians are not in service to the citizens; instead, they want citizens to be at their service.'

Other observers are more sanguine. Francesco Fiore, a partner at law firm Quorum Legal Network, which has offices in Rome and Milan, feels that 'Italian politicians have at last understood that without a strong and reliable government, Italy will slowly become a problem not just for Italians themselves but for the whole EU. The current government is the best solution we can adopt to pull Italy out of the crisis.'

Even Alessandri concedes that 'the coalition approach is very interesting. The big reforms the country needs can only be done this way.'

However, it's wrong to lay the blame for Italy's woes solely at the feet of the current government, which, to its credit, seems to be making all the right noises - its inclusion of many women in the cabinet and its reformist agenda, for a start. Business's disenchantment with the Italian way of doing things can be tracked back to the 1990s or even earlier.

In his excellent Good Italy, Bad Italy (Yale University Press, 2012), Bill Emmott explains the origins of the Italian malaise.

'Greeted by stagnation, by political paralysis, by the tragic-comic opera of the Berlusconi era, by frequent evidence through strikes and demonstrations of the resistance to change, it is all too easy to think that the country has lost its spark altogether,' he writes. 'But if vitality, enterprise, humanity and ingenuity can be seen even in the obstructed, stagnant, disappointing times, then there must be some hope of a better outcome if some of the obstructions, temptations and burdens could be lifted.'

What business wants now is for government to start sorting out the mess so that Italy's potential can be realised. But what are these burdens?

It's no coincidence that 90% of Italian businesses have fewer than 15 employees and a huge number are family-owned (SMEs account for 80% of Italy's economic output).

It's down to a law called the Statuto dei lavoratori, passed in 1970, which made it illegal for companies with more than 15 employees to dismiss workers except for 'just cause'.

Unfair dismissal by such a firm will require an appearance in court; firms with fewer than 15 employees have to pay compensation. The result of the legislation is that most companies limit themselves to 15 workers in order to retain some flexibility over staff numbers - at the expense of growth.

Alessandri at Technogym, which employs 1,000 people in Italy and another 2,000 around the world, says labour reform must top the government's agenda. 'We need to be more like England.'

He blames the heavy state bureaucracy facing entrepreneurs. 'The number of permissions and authorisations needed for every little thing is too much. We lose a lot of time and we have lost many opportunities because of this.'

Marco Ferri, MD of Rome-based transport and logistics company Alberto Ferri, agrees. 'I hope it's possible for the government to understand quickly that its priority needs to be work - to send a strong signal that the cost of employment will be reduced for businesses.'

Onerous labour laws aren't the only shackles on the Italian entrepreneur. Lack of credit is a big problem. In Italy, 90% of corporate finance is raised through bank loans.

According to the Bank of Italy, such loans to the private sector fell by 38bn (£32.2bn) in 2012, and the amount of borrowing has started to fall again.

'There is no time left,' Giorgio Squinzi, president of Confindustria, Italy's equivalent of the CBI, told the FT recently. 'We are at the end, we are running out of oxygen.' He called the lack of credit 'an emergency issue' for the country.

Alessandri adds that 'financial services do not exist in Italy. Venture capital does not exist. The private equity approach does not exist - and banks do not take any risks. They take only the low-hanging fruit.'

On top of the credit famine and the bureaucratic stranglehold, life conspires to stifle the considerable entrepreneurial spirit and creativity of the Italians.

The country is intensely corrupt. According to Gian Maria Fara, president of think-tank Eurispes, Italy has three GDPs. There's the official figure, which stands at 1.54trn; the hidden GDP of the black economy, which adds another 35%; and the criminal GDP of the mafia, which he estimates at more than EUR200bn.

The unofficial GDPs might be all that is keeping Italy from imploding, he suggests.

Where does this sorrowful state of affairs leave Italy's next generation of entrepreneurs? Youth unemployment has reached nearly 40% and, according to Eurispes, 59.8% of Italians aged 18 to 34 in 2012 said they'd leave the country if they could.

Few will actually do so: fatalistic moaning is a classic Italian trait. 'I'm worried about the younger generation', says Alessandri, whose daughter is part of the Italian diaspora in London.

As Emmott eloquently puts it: 'In its frustrated, partly dispossessed younger generation, forced to work on short-term contracts or not at all, deprived of traditional openings and opportunities, Italy has just the sort of group of young trouble-makers that could prove motivated enough to try new things, to come up with new ideas, to start to shake the country out of its conservative slumbers. Some may choose to do so in Paris, London or New York, but not all of them, surely.'

One can only hope so.

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