Interview on italy: "the country has a structural problem"

Italy’s economy should be saved in a healthy way. That won’t work, says Siegfried Breuer from Germany Trade&Invest in an interview with Much bigger problems are youth unemployment and the unwillingness of small entrepreneurs to invest money in their own businesses.

What’s wrong in Italy?

Siegfried Breuer: Italy has lost its international competitiveness because politicians have not dealt with existing structural problems. The country suffers less from over-indebtedness than it has long-term growth weakness.

Siegfried Breuer has been Germany Trade’s representative in Milan since 2009&Invest (GTAI), the business development agency of the Federal Republic of Germany. The economist has been advising German companies on foreign markets since 1978; before Italy he lived and worked in India, Tunisia and other African countries.

Where does this weak growth come from??

Breuer: Italy has occupied some niches in which it is very competitive internationally. Clothing, special machines or high quality food. This is where the export boom that we are experiencing at the moment comes from. At the same time, however, more is imported than exported, for example because Italy has to cover almost all of its energy needs through imports. This is one of the country’s structural weaknesses. In addition, more than 90 percent of Italian companies are family businesses, which makes it difficult for the economy to be competitive with other European countries.

In Germany, family businesses are associated with good qualities. Why is it different in Italy?

Breuer: In Italy, too, many family businesses are extremely successful in their small niches. But you have another problem here: you don’t grow. While a small Swabian entrepreneur puts his profits back into his own business, i.e. reinvested and thus continues to grow, an Italian, for example, tends to put his profit into real estate. That gives him security, but it keeps the companies small. This problem is widespread among Italian family entrepreneurs.

Is the economic weakness also caused by the fact that the country lacks large-scale industry??

Breuer: Yes, there is no big industry. There are also some large companies, such as Fiat. But here, too, the Italian structural problems are evident: Fiat does not make a profit in any of the Italian companies. Profits are made in foreign production facilities, for example in Poland.

What keeps foreign investors away from Italy??

Breuer: One of the most important factors is legal uncertainty. Mario Draghi, head of the Italian central bank, estimates the loss of growth due to the poor state of the Italian judiciary alone at one percentage point. That is a lot. In Italy, for example, you need three years to complete a trial in the first instance. The World Bank ranks Italy 157th out of 183 countries in terms of legal certainty – behind countries such as Iran, China, Ethiopia and many other countries. Germany is in 6th place and France in 7th place.

Another problem is the labor market. Young people do not get a job, neither do university graduates, so no young, modern know-how flows into the economy. Youth unemployment is currently almost 30 percent.

Why is that?

Breuer: On the one hand, this is due to the fact that the companies are not growing, i.e. no new jobs are being created. In addition, it is hardly possible in Italy to part with older employees as an entrepreneur, which is even more expensive than in Germany, where long-term employees are compensated with high severance payments even if they are laid off. All of this leads to the Italian labor market becoming encrusted. However, it urgently needs to be opened – above all to eliminate youth unemployment and thus to bring new impetus to the economy.

"Bureaucratic arbitrariness"

The third problem is the bureaucracy. You have a central government in Italy that makes laws. In their implementation, however, the countries, in Italy they are called regions, are very autonomous. So there is no uniform implementation of the laws. And sometimes the bureaucracy on site creates hurdles that cannot be overcome.

Do you know examples?

Breuer: I know of a company that has its headquarters in southern Italy – in the flat construction that is common there. And when the house was finished, suddenly there was the requirement that the roof must have shingles. Not a single house within a radius of many kilometers has shingles on the roof, but the building authorities cannot be dissuaded. This is an example of pure bureaucratic arbitrariness, and unfortunately not an isolated case. This makes certain regions in Italy unattractive for companies.

"The south falls away"

Which regions are they?

Breuer: In the south there are structures that the government can no longer control. In the north, however, you will find structures that are very similar to those in Germany: clear and clear. The north continues upwards, the south continues to decline.

Such problems can be solved with a savings package?

Breuer: No, don’t let them. Italy is making progress on its own, but it is far behind when compared to other European countries. In addition, an austerity package can even be counterproductive if cuts are made in the areas of culture, research and technology – those areas in which austerity measures initially hurt a few, but which are aimed at the future. And this is how the country’s future is being built, because Italy, for example, urgently needs technical innovations.

"The weak growth is the biggest problem"

What do you think needs to happen in Italy now??

Breuer: Due to the political constellation, the government is no longer able to act, so it could hardly carry out structural reform – even if it wanted to. But the country urgently needs structural reforms.

Can the problems be brought under control??

Breuer: Yes, I think so – if Italy can agree on reforms. Italy continues to perform well in export markets such as clothing and the food sector. In addition, the country practiced clever debt management. Most of the debts are domestic, so the country is under little pressure from abroad. And so far Italy has had no problems getting money on the financial markets. Only long-term weak growth – that is Italy’s biggest problem.

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