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Will labor reforms sink Italy's family firms?

Along with Germany and it's Mittelstand model, the biggest part of Italy's economy is made up of small and medium-sized family firms. Yet a lack of financing and Italy's rigid labor laws have been seen by many as factors stopping SMEs from growing and coming to Italy's economic aid.

There are now hopes that Prime Minister Matteo Renzi's proposed changes to the country's rigid labor market – making it easier to hire and fire people -- can help companies survive amid the downturn.

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Dan Kitwood | Getty Images News | Getty Images

Italy has 3.7 million small and medium-sized enterprises (SMEs), employing almost 14.5 million people and contributing 459 billion euros ($581 billion) to the Italian economy, according the European Commission's October report.

In fact, Italy has the highest percentage of SMEs in the European Union with 17.2 percent of the total in the 28-country bloc. Italy's SMEs are dominant in manufacturing and sectors such as food, beverages and clothing, helping to make the "Made in Italy" logo synonymous with style and quality.

"SMEs have made Italy what it is. Owning your own business is in the DNA of Italians," Marco Elser, a partner of Capital Markets at Rome-based investment banking firm AdviCorp, told CNBC.

However, Germany overtakes Italy in terms of the contribution to its economy that SMEs have made and number of people employed, the Commission report states, highlighting the struggle Italy has had in managing to make those businesses grow.

Italian SMEs have been battling a backdrop of stagnant growth in recent years. The Italian economy unexpectedly slid back into recession in the second quarter this year, according to data released by Italy's statistics agency ISTAT in August.

Read more: Italy unexpectedly slides back into recession

As a result of the downturn, funding for businesses has declined. The Italian Banking Association (ABI) said last week that lending by banks to households and businesses could return to growth by the end of this year. That's cold comfort for businesses now, however, as September marked the 29th straight month of decline in lending to them.

Against this backdrop, Italy's Prime Minister Matteo Renzi has proposed a package of reforms aimed at dismantling the rigid laws that protect workers – particularly long-term employees. Italy's young are finding it hard to find work: The country's unemployment level among the under 25s is 44 percent, compared with Germany's 7.6 percent.

Read more: Italy economy in 'acute emergency': Ex-PM Monti

Renzi's "Jobs Act" is designed to to boost employment and investment in Italy's businesses and ultimately, to rescue Italy's economy.

Among the proposals are plans to move away from short-term contracts, introduce tax cuts for low-earners and an employer social contribution exemption of up to three years for new open-ended hires. Another major proposal is to make it easier for companies to fire workers on permanent contracts.

The package was approved by the Italian Senate last week but is expected to cause some wrangling with trade unions.

Cure worse than the disease?

Not everyone is enamoured with the proposed changes, however. Francesco Galietti, founder and chief executive of Policy Sonar, a Rome-based consultancy specialized in political and regulatory risk analysis, told CNBC that there was a risk that the "cure was worse than the disease" with some of the proposals.

One major risk, he said, was to "grossly underestimate the fiscal cost of the reform if it results in higher unemployment in the short term." He added that as the government moved towards single contracts rather than the flexible, short-term contracts often used by SMEs "many companies could use the switch as an excuse not to hire or renew contracts at all, given the economic situation now."

The costs of the changes could also put SMEs off. Wolfango Piccoli, managing director of political risk advisory firm Teneo Intelligence, told CNBC there that a proposed unemployment benefit scheme may mean additional costs for SMEs. In addition, "the cost of firing employees due to adverse economic circumstances may also increase (according to the existing legislation, it is essentially cost-free for firms with less than 15 employees)."

Read more: Why 'Italy doesn't need Germany's help'

Analysts fear the changes could endanger rather than aid SMEs, potentially breaking what one analyst called the "backbone" of the Italian economy

"The country is not going to recover until its SME's start to recover," said AdviCorp's Elser .

"Italy is nothing but a reflection of its SMEs run by moms and pops around the country, who are responsible for thousands of employees who in turn have families of their own. Without SMEs, Italy is nothing."

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