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Aug 23, 2013 | 20:36 GMT

6 mins read

The European Crisis Hits Italian Companies

 The European Crisis Hits Italian Companies

Economic conditions in Italy are likely to remain fragile in the coming years, mainly as a result of declining economic activity, a lack of competitiveness and tightening credit conditions. These factors are hurting domestic companies, which are facing increased financial problems. Because of the perennial political instability in Italy, the country will struggle to find sustainable solutions to these problems.

Roughly 6,500 companies filed for bankruptcy in Italy during the first half of 2013, a 5.9 percent increase from the same period in 2012, according to a report released Aug. 23 by the Chamber of Commerce of Monza and Brianza. In addition, some 126,000 companies are undergoing insolvency proceedings or negotiations with creditors.

According to the report, 22 percent of all the companies that closed down between January and June were located in the northern region of Lombardy, one of Italy's richest areas. The province of Lazio, in the center of the country surrounding Rome, and the southern province of Campania had the second- and third-largest numbers of bankruptcies, respectively. Tuscany in the north meanwhile saw a 33.8 percent increase in bankruptcies compared to the first half of 2012, while Calabria in the south saw a 31 percent increase. This highlights how, despite Italy's marked differences between its wealthy north and underdeveloped south, the crisis is moving north and affecting the country as a whole.

According to reports by the Cerved Group and CRIF, two financial services companies, more than 45,000 companies went bankrupt in Italy between 2009 and 2013. Between 2008 and 2012, there was a 64 percent increase in annual bankruptcies. The sector most impacted between 2009 and 2013 was construction, which accounted for 20 percent of all bankruptcies. Wholesale trade followed with 13 percent of all bankruptcies. These numbers are similar to those in Spain, where the crisis also hit the construction sector the hardest after the real estate bubble burst with the international financial crisis.

A Crisis of Liquidity and Competitiveness

The spike in bankruptcies can be attributed to Italy's long-term economic decline, a lack of liquidity and a crisis of competitiveness. Italy's economy contracted by 2.4 percent in 2012. Eurostat projects it will contract 1.3 percent this year, with a prospect of timid growth for 2014. But even before the current crisis, Italy was dealing with low growth. Between 2003 and 2007, the country saw 1.3 percent growth on average, while France grew 2 percent and Spain grew 3.5 percent.

According to Eurostat, labor costs in Italy kept growing despite the European crisis, making the Italian economy less competitive. Several reforms in the labor market were applied in the past decade, including a reform of labor legislation in 2012 during the government of technocratic Prime Minister Mario Monti. A combination of conflicting agendas among the country's main political parties, a complex fiscal system and pressure in different directions from Italian unions and industrial lobbies make substantial reforms extremely difficult in Italy. In late July, Sergio Marchionne, CEO of Italy's largest carmaker, Fiat, touched on this, generating controversy when he stated that the legal environment and pressure from unions have made it impossible to do business in Italy.

The European crisis has worsened Italy's structural shortcomings, since companies are finding it increasingly difficult to access credit. During the second quarter of 2013, only 26.9 percent of the companies that asked for credit received a bank loan, the lowest proportion since the beginning of the crisis. Credit demand is also decreasing, with the percentage of companies seeking credit dropping by half between 2012 and 2013. From May 2012 to May 2013, bank loans to companies fell by 4.2 percent. Credit is also becoming more expensive: Italy has the second-highest interest rates in the European Union, surpassed only by Spain.

The lack of credit is particularly harmful to small companies, which banks consider less reliable. This mistrust becomes more intense in the south, as evidenced by the higher interest rates southern companies must pay compared to their counterparts in the north. In March, Confindustria, Italy's business federation, said that one in three Italian companies cannot meet "operational expenses" and are starved of liquidity. This is creating a vicious circle in the country in which the economic contraction in Italy is making banks more wary of lending even as credit availability and conditions tighten. This in turn is creating liquidity problems for companies, which are finding it increasingly difficult to sustain their operations, pay suppliers and make payroll. And this in turn generates unemployment, which reduces domestic consumption and makes banks even warier of lending.

Looking Ahead

The combination of worsening credit conditions, rising unemployment and perennial political instability in Rome is becoming a dangerous mix. Italian unemployment is slightly above the EU average of 11 percent, but considerably below that of crisis-hit countries such as Spain, Greece and Portugal. Still, it rose from 7.9 percent in the first quarter of 2011 to 11.9 percent in the first quarter of 2013.

Italy's February general elections led to a hung parliament first and then to a very fragile coalition led by Prime Minister Enrico Letta. As the Italian political class is focused on the legal problems of former Prime Minister Silvio Berlusconi, the reality on the ground keeps deteriorating in Italy — one of the eurozone countries that did not experience growth in the second quarter of the year, when France and Portugal came out of recession. The anti-establishment Five Star Movement has been dealing with internal problems recently, but it could become a key actor again if new elections take place and popular disenchantment with the elites remains high. Even if the Five Star Movement collapses, new anti-establishment parties could emerge to channel social unrest.

In this context, EU bureaucrats have limited room for action. Capital still flows freely in Europe, but the European Central Bank cannot implement a targeted policy beneficial to specific countries. In Northern Europe, companies and households benefit from the European Central Bank's low interest rates passed on by commercial banks that still lend to the real economy because of domestic stability. In Southern Europe, banks can borrow money easily from the European Central Bank, but they are holding back lending since there is a growing number of consumers who cannot pay their debts and companies that are struggling to survive.

Since the European Central Bank has little power to break this cycle and target a specific region or country, the credit crunch in Italy — and the problems that it creates for companies — will remain a critical political and economic problem for the foreseeable future.

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