How Italy became a submerging economy

  • Economy
  • Monday, 14 Jul 2014

IVREA: Economic decline takes many shapes. In the northern Italian town of Ivrea, it looks like the abandoned, overgrown tennis courts where the employees of electronics giant Olivetti SpA once played.

In the 1980s, Ivrea was a European version of Silicon Valley. Of the 50,000 people employed by Olivetti, half worked in the town, enjoying generous salaries and plush corporate recreation facilities.

Today Ivrea's biggest employers are the state health service and two call centres. Together they employ 3,100 people. Olivetti still exists, but these days it is a small office machinery company.

Most of Ivrea's 30-year-olds have little work and live off their parents' pensions.

"They were exciting times. But gradually at first and then suddenly, everything fell apart," says 59-year-old Massimo Benedetto, who has worked at Olivetti for 30 years, and is about to retire.

Ivrea offers a window into a nationwide economic reversal that has few real parallels in the developed world.

Italy's economy has barely grown since 1994 and has shrunk since 2000. That is worse than any other country in Europe or any of the 34 rich and developing nations in the Organisation of Economic Co-operation and Development.

Economists look at a mix of factors to explain the long-term rise of the world's emerging economies: population and employment trends; private and public investments; the productivity of workers; and the strength of a state's legal, administrative and institutional environment.

On each one of these counts, Italy has regressed since the 1980s.

More than 120,000 Italian manufacturers have closed shop and 1.2 million industrial jobs have disappeared since the start of the century, according to business association Confindustria. In the last 20 years even Japan, with its so-called "lost decades" of stagnation, has grown almost twice as fast as Italy.

The short-term snapshot looks a little better.

Investors are giving markets a respite from the turbulence that threatened Italy's future in the single currency in 2011. Matteo Renzi, an energetic 39 year-old prime minister, has made ambitious promises and was one of the few European Union leaders to emerge stronger from May's European parliamentary elections.

Renzi is using his new political clout to lead calls for more growth-friendly policies in the European Union, though his ability to bring real change is still an open question.

Italy also remains Europe's second largest manufacturer after Germany. Home ownership and household wealth are among the highest in the OECD and private debt levels are relatively low. Italy Inc has world leaders, including eyewear-maker Luxottica SpA and Ferrero SpA, which makes Nutella.

Yet all the fundamentals that drive the economy are headed in the wrong direction. Nearly three years after the euro zone came close to collapse, Italy's public debt has climbed to 134% of its economic output, more than any other country in the OECD apart from Japan and Greece.

Like Italy, Ivrea has sunk over the last two decades. Nestled under snow-capped mountains north of Turin, the town is not poor. Many of its 24,000 inhabitants are affluent, just as Italy remains the 9th largest economy in the world.

Average bank deposits are among the highest in the country. But thousands of young people have left the town. The average age in Ivrea is now 48. That's four years older than the national average.

As Olivetti crumbled, it spawned a few small- and medium-sized businesses. But a crushing mix of high taxes and red tape makes it increasingly hard to operate, entrepreneurs in Ivrea say.

Stefano Sgrelli, 58, is a former Olivetti engineer who in 2009 founded Salt & Lemon, a company that uses drones to take aerial footage for cinema, advertising and topography. He complains about bureaucratic procedures that "stupefy" clients outside Italy and the painfully slow train that takes more than an hour to cover the 50km to Turin.

"Trying to compete abroad is like running a 100m race with a 20kg rucksack on your back," he says.


Italy's woes are myriad. Its birth rate is the 10th-lowest of 236 countries and territories ranked by the OECD. Little more than half its working-age population has a job, and public and private investments as a proportion of economic output in 2013 were at the lowest level since WWII, according to the Bank of Italy.

Investment in research and technology is about half the level of France and Germany as a proportion of economic output.

Company size is one of the problems. Italy's economy is increasingly lopsided, dependent on a shrinking pool of successful small firms but with only a couple of companies – carmaker Fiat is the most obvious – left to match European giants like Siemens, Daimler or Alcatel.

Even Fiat, which this year announced it was moving its administrative headquarters to the Netherlands and its tax base to Britain, is not the economic driver it used to be. Fewer cars are produced in Italy than in Spain, Britain, or even Slovakia.

The average Italian firm has just four workers and only about one in 100 has more than 50. The millions of small companies once seen as Italy's great strength are now a handicap.

"How can we hope to compete in a globalised world with companies of a dozen people?" asks Marcello De Cecco, economics professor at Rome's LUISS university.

Italian products have also gone downmarket. Italy specialises in medium and low-tech sectors like clothing and machine tools. High-tech goods like computers, electronics and pharmaceuticals make up only 6% of its exports.

Italy's education system churns out fewer university graduates as a share of the population than any other EU country. Italy's labour productivity has stagnated for more than a decade and is the worst in the EU.

Italy's overall productivity is even worse.

Economists call the combined efficiency of a country's courts, market rules, tax systems, bureaucracy and other elements that help business 'total factor productivity'. Italy is the only EU country whose total factor productivity has declined since the start of the century, according to the European Commission.

That has hit living standards. In 1994, Italy's per capita GDP adjusted for the cost of living was about the same as that in Britain and France, according to the IMF. Today, it is just 80% of those countries.

Vito Tanzi, an economist and former government undersecretary, says the closest comparison is Argentina, which was among the world's largest economies in the early 1900s.

Argentina is now 26th, just below Belgium. Italy may not be a serial defaulter like the South American nation, but "you can learn a lot about Italy by looking at Argentina," says Tanzi.


There is no single reason for Italy's economic decline, just as there is no one explanation for Olivetti's downfall.

Camillo Olivetti founded the firm in 1908 to make classy typewriters. It blossomed as a pioneer of electronics under his son Adriano in the 1950s, producing one of the world's first fully-transistorised computers in 1959.

Its first personal computer, unveiled in 1965, was used by NASA to help plan the Apollo 11 moon landing. It also made the world's first electronic typewriter in 1978. In its heyday, Olivetti's cutting-edge products enjoyed profit margins of up to 35 times production costs. It ploughed that income into R&D.

Sales and profits peaked in the mid-1980s, when Olivetti's M24 computer sold more than 200,000 units in the US.

Business magnate Carlo De Benedetti bought Olivetti in 1978, and enjoyed initial success. But in the early 1990s, De Benedetti began to focus on the rest of his portfolio: finance, food and publishing.

He sold Olivetti's personal computer division in 1997 and moved the company into telecommunications.

It was the beginning of the end. Olivetti now has fewer than 700 workers globally. It posted €265mil euros in sales last year, selling cash registers, printers and its own iPad, known as an "Olipad."


Many in Ivrea blame the Italian state for not promoting a tech-savvy culture. The crucial failure, however, was what came after Olivetti's demise: nothing.

Olivetti's fate has been shared by other European industrial giants like Finland's former mobile phone maker Nokia, Sweden's carmakers Saab and Volvo or British Leyland in the UK. But in Ivrea, little thought was given – by government or private individuals – to regeneration.

The state, which runs most of the country's pension schemes, offered generous retirement packages to Olivetti workers. Early retirement schemes are one reason Italy spends more public money on pensions as a share of national output than any other EU country: 15% compared to 11% in Germany and 7% in Britain.

It is also why laid-off workers have little incentive to retrain or seek new jobs.

Former Olivetti employees who have reinvented themselves as entrepreneurs have focused primarily on exportable products.

Antonio Grassino, a one-time Olivetti engineer, now runs a firm that tests electronic circuits. Seica SpA employs 110 people and has an annual turnover of € 21mil, 80% of it from exports. Clients include Boeing, Samsung and Thales.

Grassino says political instability makes it impossible for companies and individuals to plan ahead. Italy has had 65 governments in the 69 years since WWII. New governments regularly rip up their predecessor's efforts and start again.

"You never know if a tax incentive that has been announced is really operative or how long it will last," he says. 

For foreigners, it's even harder to navigate the changing rules and regulations. Foreign direct investment in Italy has fallen by 58% in the last six years.

Stefano Sgrelli, the Salt & Lemon founder, got a job with Olivetti in 1980 after he designed software for a computer game. He spent three years at Olivetti in California, before leaving in 1993 to set up his own computer services company.

Since 2009 he and his four partners have dedicated themselves to Salt & Lemon, operating drones for a growing range of clients from cinema to agriculture. Like many in Ivrea he is exasperated by red tape.

Before he can bill his customers in Italy, he says, he has to prove he paid his workers' welfare contributions. Yet it's hard to get that information from state agencies whose records are not up to date.

"That is why so many Italian businessmen are successful abroad. They can't believe how easy it is," chuckles the moustachioed Sgrelli.

His 22-year-old daughter Diana studies engineering at Turin University. He hopes she will leave after graduation.

If she does, she will be joining an exodus. Italian emigration, which virtually dried up in the 1970s, has jumped again in the last 10 years. Since 2011 an estimated 250,000 Italians have moved to London alone.

"When you are faced with an organisation or a country that doesn't work there are two solutions: protest or departure.

Departure reduces the pressure of protest and therefore also reduces the possibility of internal change," says Luigi Zingales, economics professor at Chicago.

Renzi is the latest to promise reforms.

Sgrelli tries to be optimistic. "I think that, with a terrible slowness, things will evolve," he says. "But we are talking in terms of generations, not years." – Reuters

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