Italy: A Daunting Path to Prosperity

PISA, Italy — Six years ago, the Swedish retail giant Ikea planned a 60-million-euro megastore just a few miles from where the Tower of Pisa leans into the earth. Backers said the huge construction project, new roads and wave of shoppers would bring hundreds of sorely needed jobs to this bucolic corner of Tuscany.

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But things got tangled — as they often do in Italy, where bureaucracy and politics can easily overwhelm economics.

Each application that Ikea filed seemed to require yet another. Each mandatory impact study begat the next. By May, when a local mayor had still not decided whether the company could get a building permit, Ikea put out word it would abandon the plan.

As Italy teeters on the edge of the European debt crisis, it can ill afford more debacles like that one. Otherwise, despite having the world’s seventh-largest economy, Italy may have little hope of outgrowing the staggering debt load that could threaten its financial future — and that of the euro monetary union.

Already, investors seem skeptical whether Italy and other debt-saddled European countries can right themselves, despite the financial rescue plan for Greece that Europe’s leaders agreed to last week.

On Thursday, Italy’s borrowing costs jumped almost a full percentage point at an auction of 10-year bonds, compared with just one month ago. At 5.77 percent, the interest rate was more than twice what financially buoyant Germany must pay on bonds of the same maturity. As higher interest rates make it even harder for Italy to reduce its debt, the main recourse would seem to be faster growth.

“This is the only major issue for Italy now — to resume growth,” said Francesco Giavazzi, an economics professor at Bocconi University and a research fellow at the Center for Economic Policy Research in London.

Italy must not only encourage big corporate investments like the Ikea project, experts say, but it must also remove impediments that stifle growth in the thousands of small and medium-size companies that make up the backbone of its economy.

One small-business man, Mauro Pelatti, says he has given up on expanding his business in Florence, an hour east of here. “Bureaucracy is so strong, and taxes are so high, that it’s virtually impossible,” said Mr. Pelatti, whose privately held company, Omap, makes parts for steel-stamping machines used on products like Vespa scooters.

Italy’s economy experienced paltry growth starting in the late 1990s, when the country’s manufacturing was overtaken by competitors in Asia. Then came the global financial crisis in 2007, which shrank Italy’s economy by more than 6 percent.

Growth has resumed, but the International Monetary Fund predicts “another decade of stagnation,” with Italy’s gross domestic product expanding by only about 1.4 percent annually in the next few years. (The German economy, Europe’s growth leader, grew 3.5 percent in 2010 and grew by 1.5 percent in the first quarter compared with the same period a year ago.)

Hindering growth is Italy’s heaving government debt, which at 119 percent of gross domestic product is second only to Greece’s among euro zone members. Although it has run a budget surplus, minus debt costs, for several years and recently passed a 48 billion deficit-reduction plan, the Italian government now spends 16 percent of that budget on interest payments — a bill that will rise if investors and creditors continue to fear that Italy cannot escape Europe’s debt crisis.

Barriers to growth ...

Currently, the amount of Italy’s debt held by foreigners — nearly 800 billon euros — is more than that of Greece, Ireland and Portugal combined. Should Italy stumble, the aftershocks would be more disruptive than anything the euro zone has felt so far in the crisis.

The barriers to growth make for a daunting list. For starters, national leaders like Prime Minister Silvio Berlusconi and even mayors of the smallest towns tend to be caught up in politics that distract them from the economy’s plight. What is more, productivity has been flat for a decade. And corporate taxes are around 31 percent, not counting an array of local taxes assessed to businesses.

Italy is also plagued by an incorrigible black market that is estimated to make up 20 percent of the economy and that exists partly because of the market’s dysfunctions. The related tax evasion deprives the Treasury of an estimated 100 billion euros in revenue each year.

Few believe the government can easily eliminate some of its biggest problems, namely the Mafia and the black-market economy. But Italy’s leaders do have the means to foster growth in the legal economy, many experts say. Specifically, Rome could start untangling the bureaucracy that ensnared Ikea and put a stranglehold on thousands of smaller Italian companies.

“Just to start a business, you usually have between 10 and 20 authorities you need to deal with,” said Giampaolo Galli, the general director of Confindustria, Italy’s main business lobby. “Then you go to the government for help, but you don’t find any.”

Ikea hit the bureaucratic burden head-on when it sought to build a store near here in the town of Vecchiano, on a large vacant lot that now dances with sunflowers. Although Ikea has 20 stores across Italy, Vecchiano proved to be a special case.

On average, it takes five years from the moment Ikea requests a building permit in Italy to the day it opens its doors. In Vecchiano, however, six years went by while the mayor at the time called for studies and town hall meetings. Many voters did not want a big-box retailer in the countryside or the traffic it would bring.

But many others wanted the Swedish retailer to be present, said Anna Pullace, a local bookstore owner. In a region besieged by high unemployment, Ikea would have brought 350 new jobs and help stimulate the larger Tuscan economy.

Six years was simply too long for Ikea. “We’re not an N.G.O. — we’re a profit-making company,” said Valerio Di Bussolo, a company spokesman in Italy. “We need certainty about our investments.”

On the day Ikea announced it was pulling out, the president of the Tuscany region, Enrico Rossi, rushed to offer his help. Now the nearby towns of Pisa and Livorno are both courting Ikea.

Meanwhile, the new mayor of Vecchiano — the previous mayor was voted out — wants Ikea to reconsider. But the company says it is too late, and that it wants to consider building in one of the nearby towns.

It is an opportunity squandered for now, in the view of Ms. Pullace, the bookstore owner. “In this moment of crisis in the country,” she said, “we need to take every opportunity we can get.”

Ikea’s lament is echoed by businesses of all types.

Mr. Pelatti, owner of the parts maker Omap in Florence, complains of continual streams of government-mandated paperwork, inspections and even state doctors’ visits to check on his employees — all at his expense.

Because Italy protects guilds, Mr. Pelatti says he must outsource the writing of paychecks for his five employees, at an average expense each month of 50 euros a check. “A company like ours has costs of up to 20,000 euros a year just for the paperwork,” he said.

And then there are the taxes. On a 200,000-euro profit, he says, he has a tax bill of about 100,000 euros. “Even if I make a profit, I never make enough cash to get bigger,” he added.

A two-hour train ride to the northeast of Pisa lies Padua, one of Italy’s major industrial centers. But there, too, hundreds of small family-run firms, usually employing five or six people, face similar problems.

Mario Carraro is one of the few businessmen in Padua who managed to break the mold. Years ago, seeing the challenges of globalization, he focused on improving technology and productivity at his factory, which makes tractor transmissions for companies like John Deere and Caterpillar. Now his company, Carraro, is publicly listed and employs 2,000 people in Italy and another 2,000 in China and India.

Italy needs more of its companies to become like his. But when Mr. Carraro looks around, he sees stagnation. “We used to call these firms the ‘piccolo bello’ — small is good,” he said. “But now they are dying.”

—Gaia Pianigiani contributed reporting from Rome.