Food, wine, fashion, architecture, history...what’s not to like? A sojourn through northern Italy in the spring and fall, dodging the heat and tourist crush of summer, is bucket list worthy!
Italy is the 3rd largest economy in Europe after Germany and France and the 8th largest in the world. While olive oil, lemon, and garlic may contribute to a gastronomic paradise, as an economic engine the land of la dolce vita is suffering. Under the debt crisis that also hit the U.S. from 2008-2013, 45,000 companies went bankrupt, including old-line firms that had operated for 50 years or more. Total unemployment as of August 2013 stood at 12.2%, with youth unemployment at 40%.
Commentary in Germany’s Spiegel Online by Hans-Jurgen Schlamp (7/24/13) indicated that over half a million industrial jobs have been lost since 2007 and 15% of the country’s industrial capacity is gone. The Bank of Italy forecasts an economic contraction of 1.9% this year. Italy would be happy with our tepid U.S. growth rate of around 2%.
Rising production costs and competition from abroad is partly to blame, but the real culprit is the euro, a monetary union without a political union. In the past the Italians would devalue their currency, the lira, to remain competitive. With the euro, struggling economies like Italy, Greece, Ireland, and Portugal, have lost control of monetary levers. A vicious cycle of recession, bankruptcy, and declining purchasing power for citizens results.
While Italian wages are 15% lower than Belgian and French wages and 30% lower than Germany, unit labor costs are 30% higher than German levels. Unit labor costs are a measure of productivity calculated by dividing total labor compensation (including benefits) by real output. Rising unit labor costs reduce profitability unless a firm can shift higher costs to its customers.
One response by pressured firms is to ship jobs abroad to lower cost venues. Spiegel cited Antonio Merloni SpA in Fabriaono, a city in the Adriatic region. Out of 6500 jobs in Italy, only about 1450 will remain as production is shifted abroad.
When jobs are lost, tax revenues shrink while the demand for government services rises, triggering another spiral. Politicians respond by raising taxes. The Italian economy faces a tax burden 20% higher than that of Germany, itself a relatively high tax venue.
Italy is famous for a bloated bureaucracy that impedes economic activity. Spiegel Online cited an inefficient judiciary that can tie investors and companies up in trials that may last for decades, a relatively low education level, poor infrastructure, an energy supply prone to failure, delayed trains, and outmoded communication networks. As a recent traveler in Italy, I traversed some beautiful highways, but they were toll ways. Gasoline averages about $10 a gallon. Italians living on the French border cross into France to buy cheaper gas.
Italy is rated by the World Competitiveness Center as 44th in the world as a place to invest, only slightly above Spain and Portugal, and below Latvia, Russia, Peru, and Philippines, as an example. Consequently, interest rates are high. Ten-year government debt costs 4.28% in Italy versus 1.87% in Germany. That deters growth.
So does political squabbling. On September 25 resignations by five ministers from Silvio Berlusconi’s center-right party threw the government into crisis. A few days later Prime Minister Enrico Letta barely survived a confidence vote in Parliament. Italians tend to regard the leadership in Rome as self-serving, and quoting writer Schlamp, “partly corrupt, ideologically pig-headed and mostly unwilling to compromise.”
As a place to visit, I love Italy. But the Italian “no growth crisis” offers lessons for our policy makers. Human reaction to inefficient bureaucracy, oppressive and complex regulations, high taxes, and decreased opportunity is universal. Just as Italians on the border go to France to get cheaper gas, “money goes where it is best treated.” Capital is fungible, it flows to where rewards are the greatest. We get away with a great deal because the dollar is the world’s reserve currency. But “la dolce vita” funded with debt and heavy taxes cannot go on forever. Washington, are you listening?
Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092 ▪ 770-441-2603 ▪ email@example.com