Italian firms fight to hold head above political water

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 SpA 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,” Mr. 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 Mr. 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.

Mr. 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.

Companies have long said they are reluctant to recruit staff even in good times because labour laws make it hard to shed workers if their business turns down.

Confindustria estimates the political malaise is responsible for 2 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 now yield about 4.8 per cent.

Because government bond yields set the benchmark for corporate borrowing costs, Mr. Marchesini is paying interest of 4-5 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 euro zone 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.

Speaking during a business trip to India, Mr. Poletto contrasted what he called Asia’s amazing desire to succeed to Italy’s constant concern to preserve past gains. “Here they want to win; we in Italy are afraid to lose the privileges we have. We need a wake-up call,” he said from Mumbai.

Domestic car maker Fiat SpA has frozen a multibillion-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 aluminum 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.

“We’re at one of the lowest points in our history,” said Franco Manfredini, head of the ceramics employers’ association in the town of Sassuolo, where 80 per cent of Italy’s tiles are produced. “We have to become a serious country.”

To make up for a slide in domestic sales, which were down 16 per cent in the first half of the year, local tile makers are opening factories abroad, emphasising innovation and exporting more. Tiles from Sassuolo, an hour’s drive from Bologna, clad Brisbane airport and Riyadh’s biggest shopping mall.

Mauro Sacchetto, the chief executive of Datalogic, a leading producer of bar code readers, says a succession of governments has neglected the sort of cooperation in research between industry and universities that his company enjoys in Vietnam, where it opened a plant in 2009 that now employs 600.

“Italy’s reputation is due to a lack of credible, reliable politicians. We have enough of an industrial culture to prove that we are much better than our political and banking reputation,” Mr. Sacchetto said.