On the Brink in Italy

“A year and a half ago, the noise from production was so loud that you had to shout to be heard,” said Mr. Tedeschi, walking amid pallets of cherry and other fine woods stacked up and waiting for a purpose.

Since a government austerity plan took hold last year, the Italian economy has tumbled into one of the worst recessions of any euro zone country. Mr. Tedeschi’s orders have all but dried up. His company, Temeca, is still in business, but barely.

Businesses of all sizes have been going belly up at the rate of 1,000 a day over the last year; especially hard hit among Italy’s estimated six million companies are the small and midsize companies that represent the backbone of Italy’s $2 trillion economy.

Economists worry that the pace of business closings may accelerate as long as the country lacks a functioning government. The departing prime minister, Mario Monti, was ousted by austerity-weary voters, but the election left Parliament gridlocked.

“With no one governing the country, there will be more paralysis, so things will get worse,” said Mr. Tedeschi, 49, casting a worried glance at his wife and their 23-year-old son. They help fill the trickle of orders, now that Mr. Tedeschi has had to lay off six of the 11 full-time employees he had in mid-2011.

With the European Union standing as America’s largest trading partner, the economic problems that plague Italy — and the rest of stagnating Europe — are felt across the Atlantic.

“This underscores the likelihood of Italy having a Japan-like decade with phenomenally slow growth,” said Kenneth S. Rogoff, a professor at Harvard and a former chief economist of the International Monetary Fund. “And it raises painful questions about the long-run stability of growth in the euro zone over all.”

Italy’s political quagmire might not disturb global financial markets right away, Mr. Rogoff said. But it raises the specter of the European crisis “grinding on and on,” he said, and it would certainly make it harder for European leaders to cut deals “on the big-picture things that are needed to stabilize Europe.”

The afflictions of Italy’s economy, one of Europe’s largest, are not new, of course: a lumbering bureaucracy, stifling labor regulations and an eroding ability to compete in the global marketplace. As the economy of the 17 members of the European Union that use the euro as their currency was expanding at a weak average of 1 percent a year for much of the last decade, Italy grew at only half that rate, according to the International Monetary Fund.

But Italy’s longstanding problems have grown worse in the last year as tax increases and spending cuts were pressed by Mr. Monti, who took over as prime minister in November 2011 after the euro crisis forced out Silvio Berlusconi. Last year the economy shrank 2.4 percent.

One in two small companies cannot pay its employees on time, according to CGIA di Mestre, a research institute. With layoffs surging, unemployment rose to 11.7 percent in January. Youth unemployment has jumped to 38.7 percent.

The austerity program was intended to reduce the risk of a debt crisis and ensure the backing of the European Central Bank, but instead it left the country with no growth. And without growth, Italy will have a harder time paying down its 2 trillion euros ($2.6 trillion) in debt, one of the largest debt burdens in the euro zone.

“For growth and unemployment to improve, we need to have a government that can remove uncertainty for businesses, consumers, investors and banks,” said Tito Boeri, the director of the Fondazione Rodolfo Debenedetti, a research firm based in Milan. “Political instability is probably one of the most damaging things for the economy.”

Gaia Pianigiani contributed reporting from Rome.

Article source: http://www.nytimes.com/2013/03/12/business/global/12iht-euitaly12.html?partner=rss&emc=rss