Yves here. Italy provides an intriguing example of how austerity inflicts damage on businesses. Here, one of the ways that the government is making its fiscal deficit look better is by paying companies that provide services to it slowly, or not at all.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
Italy is a country of entrepreneurs and of vibrant small enterprises. Or was. Now these businesses are dying.
Of its 5.3 million companies (as of December 31, 2013), 3.3 million are small, often family-owned outfits, according to Rome-based credit information provider Cerved Group. And another 900,000 are sole proprietorships, or 17% of all companies, a larger percentage than anywhere else in the EU, ahead of France (12%), Spain (10%), and Germany (10%). The remaining 1 million companies are corporations of all sizes.
And life in Italy has been exceedingly tough for small outfits.
Consumer spending has dropped sharply since the onset of the crisis. Industrial production continued its downward spiral in September and is down 0.5% for the first nine months of 2014 over the same period a year ago. Unemployment is 12.6%, and rising. Youth unemployment is at a catastrophic 43%, up from an already terrible 26% in 2010.
It doesn’t help that the government refuses, and I mean refuses – due to “technical” problems, as a minister explained – to pay its long overdue bills to these already strung-out businesses. It’s a shell game to lower Italy’s overall indebtedness and thus pacify the financial markets and Italy’s masters in Brussels [Italy “Would Love To” But Can’t Pay Its Bills This Year].
So this shouldn’t come as a surprise, given that the largest customer in the country, the government, refuses to pay its bills to the members of the private sector which then can’t pay their own bills: in September, non-performing loans held by Italian banks jumped 19.7% from a year ago, according to the Bank of Italy. At the same time, loans to the private sector dropped 2.3%.
It’s a mess.
Economic “growth” has been negative or zero for the last 13 quarters. And this is what Italy’s glorious “recovery” from hell looks like:
Businesses have had a hard time in this environment. In the third quarter, the number of businesses created dropped to 72,800 the lowest for that period on record, going back to 2005, according to Unioncamere, the umbrella group of the Italian Chambers of Commerce. And 56,400 businesses collapsed or disappeared for other reasons.
But the real fiasco is playing out among the smallest companies. In Q3 2007, before the crisis tore into Italy, nearly 30,000 of them were created, while nearly 24,000 went out of business. OK, being an entrepreneur is risky and failure is common. But these small businesses are part of the economic engine in Italy. In Q3 this year, only 17,800 were created, down a staggering 40% from 2007.
The chart below, which compares business creations and destructions in Q3 of each year, shows how terrible that trend has been for small businesses:
Net creation and destruction of businesses started to skew the wrong way during the financial crisis in 2009, and instead of recovering, it got worse, with fewer and fewer businesses being created. And so for Q3 of the last three years, creation of these businesses has fallen below the number of business creations – resulting in net destruction of what is supposed to propel the economy forward:
And the survivors? 24,000 companies with sales between €2 million and €50 million are at “high risk” of defaulting within a year, according to Cerved. By comparison, between 2008 and the first half of 2014, fewer than 19,000 similar-sized companies commenced default procedures.
Daniele, an Italian entrepreneur who has been struggling for years with all the issues of building a business in Italy, wrote this in his eloquent and humorous commentary, “We, the Savvy Italians….”:
In the early 2000s, a new spending trend set foot in Italy: “Buy everything now and pay when you want.” In 2014, the middle class here is much more impoverished than it was 15 years ago. And if that wasn’t enough, since our government isn’t really capable of cutting down expenses and lowering taxes, we had many industries that moved to Asia, and we lost jobs.
With a lower base we have seen a gradual lift in taxes. And at the time when Italy was having trouble refinancing its debt, our government introduced taxes on properties and bank accounts. So, we, the savvy Italians, are paying heavy for our government failures: we have a 22% VAT, a 37% minimum revenue tax, 75% taxes on oil products…. I have calculated that in my case I pay more or less 67% of my income in taxes.
No, we are not in a rosy situation here. But as an entrepreneur I know many businesspeople; people here are eager to start something new but can’t because we are crushed by our country’s debt. If finally we could have somebody with a brain in our government, this country would bloom again.
Daniele’s words portray better than anything else what is happening on the ground in Italy to generate these ghastly economic statistics and charts. We wish him the best in his struggle.
“Punishment Interest” is what the new phenomenon is lovingly called in Germany, whose savers the ECB intends to flog until their mood improves. Read… The Wrath of Draghi: First German Bank Hits Savers with ‘Negative Interest Rates’
Yes, the situation in Italy is terrible. I am old enough to remember the booming ’80s and the prosperous ’90s, and now it feels like a different country. I am also young enough to emigrate, which is what I did.
But the problems started long ago. The economy has been slowly dying since the beginning of the 1990s, when public debt stopped ballooning and Italy was kicked out of the EMS. Way before the Euro, the 2008 crisis or the 2001 crisis.
In a way, we have had a “zombie-government” since then: the most sensible thing would have been to default on the huge public debt and face the short-term consequences. Instead, the Maastricht treaty made sure that Italy kept on paying interest on the debt, and slowly decreased whatever money went to investment and the welfare state.
We have been slowly bleeding for almost a generation, even though the last devaluation of the lira and the dot.com-boom masked many of the problems in 1990s
The weakening of the state has allowed the worst of society to flourish: organized and petty crime alike, secessionist movements, cronyism, corruption and a general sense of amoral materialism. The impossibility to devalue the currency, the GFC and the Euro crises have compounded the problems: now we have a zombie government, zombie banks and zombie export markets.
So yes, the economy is doing badly. But it is not news, and it is a limited perspective on the overall situation.
While I have a lot of respect for Wolf Richter’s analysis, I have to question this claim:
Call me crazy, but that can’t possibly be right, can it? :-)