Austerity leaves scar on Italy

Though not yet in need of a bailout, as businesses close and jobs shrink, the mood is bleak, writes Liz Alderman.

Emanuele Tedeschi wiped sawdust from his hands and gestured around the cavernous woodworking factory that has been in his family for two generations. The big machines, which used to run overtime carving custom furnishings for private homes, Roman palazzi and even the Vatican, sat idle on a shop floor nearly devoid of workers.

"A year and a half ago, the noise from production was so loud that you had to shout to be heard," said Tedeschi, walking amid pallets of cherry and other fine woods stacked up and waiting for a purpose.

Since a government austerity plan designed to shield Italy from Europe's debt crisis took hold last year, the economy has tumbled into one of the worst recessions of any eurozone country, and Tedeschi's orders have all but dried up.

His company, Temeca, is still in business, but barely.

But among Italy's estimated 6 million companies, businesses of all sizes have been going belly-up at the rate of 1000 a day in the past year, especially among the small and mid-size companies that represent the backbone of Italy's €1.5 trillion ($1.79 trillion) economy.

Economists fear the pace of business closures might accelerate as long as the country lacks a functioning government. Although the technocratic prime minister Mario Monti was ousted by austerity-weary voters, the election left Parliament gridlocked.

"With no one governing the country, there will be more paralysis, so things will get worse," said Tedeschi, 49, casting a worried glance at his wife and their 23-year-old son. They help fill the trickle of orders now that Tedeschi has had to lay off six of the 11 full-time employees he had in 2011.

Last year, nearly 365,000 businesses failed. One in two small firms cannot pay their employees on time, according to CGIA di Mestre, a research institute.

With lay-offs surging, unemployment hit a record 11.7 per cent in January. Youth unemployment has jumped to 38.7 per cent. And while Italians are big savers, a recent study by the Bank of Italy showed that more than 60 per cent now worry that their income is no longer enough to cover their needs.

The austerity program was intended to reduce the risk of a debt crisis and ensure the backing of the European Central Bank, but instead it left the country with no growth. And without growth, Italy will have a harder time paying down its €2 trillion debt pile, equal to 127 per cent of economic output, one of the largest debt burdens in the eurozone. And while no one is talking about the need for an Italian bailout or a default, on Friday ratings agency Fitch cut Italy's sovereign credit rating by a notch, citing the risk that prolonged political uncertainty could further erode growth and the nation's finances.

In some respects, Italy is not as hobbled as some other euro countries. It has an enviable primary surplus, a measure of the economy without counting debt payments, of 2.5 per cent of gross domestic product.

And the Italian government made progress in shrinking the budget deficit, which had been 4 per cent in 2011, to 2.3 per cent last year. That is under the 3 per cent threshold that eurozone members are supposed to stay below, but few do. Industrial icons such as Ferrari and Benetton and Ducati continue to help Italy maintain the eurozone's second-largest manufacturing base after Germany.

But it is businesses such as Tedeschi's - with fewer than 50 workers - that constitute the bulk of Italy's economy and are buckling as banks halt lending and taxes rise.

Credit issued by Italian banks fell last year to the lowest in more than a decade. The government owes about €70 billion for goods and services to Italian companies, which must nevertheless pay taxes on the money.

Tedeschi started feeling the pinch in late 2011 at his factory in Guidonia, an industrial town north of Rome.

Here, low-lying mountains and rolling green hills encompass mid-size factories specialising in products - whether wood, metal or marble - stamped "Made in Italy." Hundreds of those businesses have been shuttered in the past two years. "In 1½ years, everything changed," Tedeschi said. "People started feeling afraid, and they stopped spending money. All the promises Monti made to relaunch the economy and help us enhance productivity never materialised."