Sick Man of Europe

It makes you wonder if Maranello will become the next Detroit.

May 14, 2006

Italy's Once-Plucky Little Factories Now Complicate Its Battle With 'Made in China'

By MARK LANDLER and IAN FISHER

LUMEZZANE, Italy, May 11 — To find out why economists have cast Italy as the sick man of Europe, visit this dreary town of little factories huddled in the foothills of the Italian Alps.

Its specialty is brass valves, and in the last decade, the family-owned factories here have watched helplessly as their business has spiraled away, valve by valve, to lower-cost manufacturers in China.

"We don't even know exactly how much of the market we are losing," said Aldo Bonomi, the general manager of a 105-year-old valve maker founded by his grandfather. "But I am very worried. If I were smart, I'd sell the company before we fall into losses."

Stories like Mr. Bonomi's are familiar in any country that has battled the tide of global competition. What is different in Italy is that the economy — though famous for its supple leather handbags and full-bodied Tuscan wines — depends, to a greater extent than its European neighbors, on mom-and-pop manufacturers that produce everything from valves to mother-of-pearl buttons.

As a result, Italy's economic crisis appears even more intractable than the one faced by Germany, Europe's sick man for the last several years. While Germany has finally shaken off its malaise, the Italians seem almost paralyzed by their plight — raising fears that their country, lagging further and further behind its neighbors, may loosen the bonds of European integration.

Making a fresh start to catch up with the rest of Europe will not be easy.

Italian voters ousted Prime Minister Silvio Berlusconi last month to a large degree because he did not fix the economy. But then they elected a new center-left government with a parliamentary majority so slim that it may be hobbled before it even takes power.

"I'm not very positive," said Alessandro Profumo, the chief executive of Italy's leading bank, UniCredit. "We have a lot of issues to manage, and the government needs a larger majority to manage these issues."

It is clear why economic fears dominated Italy's recent election, and the epithet "sick man of Europe," conjuring images of the tottering Ottoman Empire, has become shorthand here.

A miracle of romantic pluck decades ago, the Italian economy has stagnated in three of the six years since the euro existed. Its competitive position has eroded, both globally and in Europe; and its public finances — which Italy cleaned up in the late-1990's to prepare for the euro — have once again deteriorated.

The biggest problem, however, is structural: Italy's thousands of family-owned companies, the secret to its export success in the 70's and 80's, appear ill-suited to the demands of globalization. They make products that can be easily replicated in Asia, using cheaper labor.

"Look at these valves," Mr. Bonomi said, plunking down a matched set. "This one is mine; this one was made in China. It doesn't work as well as mine, but it's close enough."

The Chinese one costs half as much.

Economists offer plenty of remedies for this situation: Italy needs to move into more sophisticated high technology manufacturing. It must bolster its service economy, starting with the tattered tourist trade, which has also lost ground to China. It must shake up its rigid labor market, the main culprit for its high costs.

The trouble is, the incoming government, led by Romano Prodi, does not have the leverage to push for radical change, especially in the Italian Senate, where his coalition holds only a two-seat majority.

"The most likely outcome is that he will water down any reform proposals well in advance to ensure that he faces minimum disruption in Parliament," said Erik Jones, professor of European studies at Johns Hopkins School of Advanced International Studies in Bologna.

Nor is Italy's entrepreneurial class likely to take matters into its own hands, as German companies did. Most of the factories are small, and many resist changes like shifting production to lower-cost countries. Italy does not revolve around national identity or M.B.A. theories of good management. The important unit is local, the family, with the equal parts of strengths and messiness that implies.

"These guys really don't want to go," said Roger Abravanel, a senior director at McKinsey & Company in Milan. "For them, to stay at home in Padua or Treviso rather than conquer the world is just fine."

Far from conquering the world, Italy's share of global trade — exports and imports — fell to 2.7 percent last year from 4.6 percent in 1995. Germany's share rose slightly in the same period. In the last five years, German labor costs have fallen by nearly a quarter, relative to Italian costs.

With the adoption of the euro in 1999, Italy's weaknesses became more glaring. For much of the 80's and 90's, Italian governments devalued the lira when they wanted to make their exports cheaper in the world market. Now, Italy has handed over monetary policy to the European Central Bank in Frankfurt, which regards devaluation as a form of voodoo economics.

No other European country has had as fraught a transition to the euro as Italy, which explains why some Italians have come to doubt the experiment altogether. Euroskeptic politicians even demand that Italy abandon the currency and return to the lira.

"Of course we have problems staying with the euro, and that is precisely why we should stay with the euro," said Domenico Siniscalco, a former finance minister in the Berlusconi government who now works for Morgan Stanley. "The euro is forcing virtuous behavior."

Last year, however, Italy's deficit ballooned to 4.1 percent of its gross domestic product, breaching the European Union's deficit cap and rekindling old fears that Italy's untidy finances would jeopardize the euro. Putting the books in order will be the first challenge for the Prodi government.

Economists speak approvingly of Mr. Prodi's likely appointment of Tommaso Padoa Schioppa, a technocrat and former board member of the European Central Bank, as finance minister.

Any assessment of Mr. Prodi's ability to make other major changes revolves around two poles. The first is his success in pushing through tough changes the last time he was prime minister from 1996 to 1998. The second — the less encouraging side — is his coalition, which critics say is not only dangerously fragile but weighted too heavily toward the far left.

In his first term, Mr. Prodi had the job of preparing Italy to join the European Monetary Union. Then, as now, many experts said the challenge was too great. But Mr. Prodi reduced public debt, made deals with trade unions and imposed a special tax to stem the tide of red ink.

In 1998 a crucial partner, Fausto Bertinotti of the Refounded Communists, withdrew his support and the government fell. Now, Mr. Bertinotti is again in the coalition, this time as president of the Parliament's lower house. Critics say the past could repeat itself, if not with Mr. Bertinotti, then with any of the government's eight other coalition partners.

Allies of Mr. Berlusconi never tire of painting Mr. Prodi's government as a hostage to the left. Mr. Bertinotti and Franco Marini, the president of the Senate, were both trade union leaders. Giorgio Napolitano is the first former Communist to be elected president of Italy.

Critics note that the government plans to repeal part of an innovative labor law, known as the Biagi law, which makes it easier for companies to hire workers on a temporary basis. Advisers to the government insist that any changes will not hinder Italy's competitiveness.

Not everyone is pessimistic about Italy's future. Emanuele Bertoli, the owner of a company that makes mother-of-pearl buttons for clothing designers like Giorgio Armani and Stefano Ricci, has thrived by putting most of his production in Vietnam and China, near the hatcheries for his pearls.

Back home, where he keeps a design studio, Mr. Bertoli, 38, said he was inspired by the sun-dappled landscape east of Milan — a region known as button valley for its many local button makers. "You are surrounded by beauty in this country," he said. "It permeates you."

Capturing this beauty, he said, and selling it to the rest of the world — whether in the form of Ferragamo shoes or Fiat cars — is how Italy can reclaim its export franchise and revive its economy.

"Men and women in the year 3000 will be buying clothes and furniture," said Pier Luigi Bersani, a top economic adviser to Mr. Prodi, arguing that Europe is impossible without Italy. "We have to do better the things that we are already doing."

 

Did you read the part where the Italian company was jobbing out to China?

From what I understand, Ferrari is, well, kinda, cheap. As much as we love these cars, working for Ferrari is another crappy job to the ones who work there.

I could be wrong, though.

Dale

 

Clue up, Neal Young singing, "The Loner."