A "stupid" law on cash transactions in Italy is killing the luxury fashion sector and cost the country 2 billion euros ($2.7 billion) last year, the CEO of a luxury tailor told CNBC.
Domestic consumption of luxury brands in Italy has been falling over the past few years as the euro zone crisis gripped the southern European country and austerity measures were imposed. But rules banning consumers from making cash payments of over 1,000 euros have only worsened the problem, according to Guglielmo Miani, CEO of Larusmiani.
"In terms of domestic consumption, there are many reasons why it is falling. About two billion euros have been lost in 2012 because of a very stupid law on cash," he told CNBC Monday.
The legislation was introduced by former prime minister Mario Monti in 2011 in an attempt to tighten up Italy's finances and tackle tax evasion, which costs the country more than 100 billion euros a year. Since the law was introduced, payments over the 1,000 euro threshold have to be paid by card or cheque -- making the money more traceable.
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Instead of helping the government eliminate tax-dodging, Miani said they are forcing consumers abroad.
"Instead of let's say eliminating underground money, the Italians are going abroad to buy their goods and therefore the government is losing VAT of over 400 million (euros) just in the fashion business," he claimed.
Italy's domestic fashion industry has been in decline. Turnover for the textile and apparel industry is expected to reach 58.8 billion euros in 2013, posting a drop of 2.5 percent compared to 2012, according to a report by the Italian Chamber of Fashion (ICF). Last year, the industry saw a decline in turnover of 5.4 percent compared with 2011.
The problems holding back domestic success are not a problem for luxury companies as the "brands are so strong", but could cause real economic damage in the future, Miani told CNBC.
"I think so far it has been great because the brands are so strong…But one day it will catch up to us and this is going to be a problem for the whole country because the only industries that are growing now are luxury, design, food, of course, and these sort of industries that have to do with a way of life that is typically Italian."
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Despite the domestic slowdown, exports continue to rise. Textiles and clothing exports are expected to increase from 43.3 billion euros in 2012 to 45.1 billion euros in 2013, the ICF report said.
Consumers in countries such as China and Russia seeking the "made in Italy" label are driving the export growth. Miani said that a strong presence abroad could potentially revive domestic demand by drawing consumers to Italy.
"The real challenge in terms of the country is to use these brands in a way that we can bring tourists to Italy and market Italy as a destination, a destination to live well, to experience unique experiences, and therefore I think it is important that the government also understands this," he said.
—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal