Sunday 23 November 2014

Italy’s new government will have to pull country out of economic quagmire

Published 22/02/2013 | 13:52

Italian Premier Mario Monti speaks during a press conference at the Italian Senate in Rome (AP)

ITALY’S new government, after elections this weekend, must cut bureaucracy and taxes and reform an ineffective legal system if the shrinking economy is to be jolted back to life, businesses and foreign investors say.

Italians vote on Sunday and Monday for a successor to Mario Monti's technocrat government whose austerity policies saved Italy from a Greek-style debt crisis but did nothing to pull it out of deep recession.

Italy's economy has contracted for six consecutive quarters, shrinking 2.2pc last year, and companies say it is time to pull down the barriers that have hampered Italian businesses and put foreign investors off Italy for years.

"I would like a government that truly thinks about growth and that could bring Italy out of the quicksand," said Massimo Scaccabarozzi, CEO of pharmaceutical company Janssen-Cilag SpA, a unit of Johnson & Johnson.

"It's no secret that we are bottom of the list when it comes to ease of business."

Net foreign direct investment, a measure of a country's attractiveness, has averaged $23bn from 2005 to 2011, equivalent to just 1.1pc of Italy's gross domestic product, according to data from U.N. economic think-tank UNCTAD.

That is half of the investment into France, a quarter of Britain's and well below all other major European economies, in percentage terms.

"(Foreign) companies find it's a more bruising experience than they expect. They complain about bureaucracy, contract enforcement and late payments," one Western diplomat said.

It takes on average 1,210 days to enforce a contract, according to the World Bank's "Ease of Doing Business" index, twice the OECD average, as Italy's creaking judicial system makes it one of the least efficient in the world for business.

Another diplomat said things were getting worse. "Competitiveness in Italy is going down. The Spanish and even the Greeks have done more in regaining competitiveness quicker than Italy."

INEFFICIENT

Italy ranks 73rd out of 183 countries as a place to do business, according to the World Bank index.

"The new government must simplify procedures, make the system more transparent and figure out how to cut labour costs," said Fabio Gianisi, a Milan lawyer who advises Chinese and Russian investors with an interest in Italy.

The total tax rate for companies, including tax on profit and labour taxes, comes to 68.3pc- one of the highest in the world.

On top of that, layers of complex bureaucracy cause endless frustration to foreign companies, causing many to turn their backs on Italy. Royal Dutch Shell dropped plans for a liquefied natural gas (LNG) plant in Sicily in November after seven years spent on paperwork.

"Foreign investors are scared as they fear being sucked into a red tape maelstrom," said Harvard economist Alberto Alesina.

Italian pharmaceutical companies, for example, need to satisfy each of Italy's 20 regions before they can sell a drug, even after winning national approval. That adds an extra year to the process.

Those doing business in Italy also struggle with chronic payment delays from the state and can get trapped for years in legal disputes over building permits, as a myriad of authorities have veto powers, giving locals the opportunity to tell industrialists: "not in my backyard".

"A big project, the expansion of a building site, should not be subject to local interests that are not aligned with the general country interest," said Sandro De Poli, chairman of General Electric in Italy.

LOSING MOMENTUM?

The most likely election winner, the centre-left Democratic Party (PD), has said the best way to cut public debt is increasing economic growth, and has made streamlining the notoriously inefficient public sector a priority.

But, with the possibility of an unstable coalition where the hard left may have to work with members of Monti's centrist grouping, few people are counting on any rapid change.

"The risk exists that after the Feb. 25 elections, there may be a loss of momentum on important structural reforms to improve Italian growth prospects," said Standard & Poor's.

The credit rating agency said failure to revive growth, rather than fiscal performance, was now the main risk for Italy, especially if the winning coalition fails to secure a majority in both houses of parliament.

Businessmen like Lorenzo Stanca of Mandarin Capital, a private equity fund that invests in small Italian and Chinese firms, agree.

"If the election results in an unstable context, then I think we can be very pessimistic about Italy's capacity to attract foreign investment," he said.

Reuters

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