Identifier
Created
Classification
Origin
06FLORENCE12
2006-01-24 11:57:00
UNCLASSIFIED
Consulate Florence
Cable title:  

APPROACHES TO ECONOMIC STAGNATION IN ITALY'S CENTER-NORTH: A

Tags:  ECON ELAB ETRD EFIN IT EUN 
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UNCLAS SECTION 01 OF 04 FLORENCE 000012 

SIPDIS

E.O. 12958: N/A
TAGS: ECON ELAB ETRD EFIN IT EUN
SUBJECT: APPROACHES TO ECONOMIC STAGNATION IN ITALY'S CENTER-NORTH: A
TALE OF TWO REGIONS

UNCLAS SECTION 01 OF 04 FLORENCE 000012

SIPDIS

E.O. 12958: N/A
TAGS: ECON ELAB ETRD EFIN IT EUN
SUBJECT: APPROACHES TO ECONOMIC STAGNATION IN ITALY'S CENTER-NORTH: A
TALE OF TWO REGIONS


1. Summary. Italian business associations from the
Emilia-Romagna and Tuscany regions report a slowdown in
traditional manufacturing industry output and a decline in
earnings for regional producers. Local observers attribute this
stagnation to a decrease in competitiveness of Italian products
due to the strong Euro and to a decline in productivity.
Additional negative factors include increased imports from
non-EU countries (including counterfeited and illegally-imported
products) higher energy and services costs, and high taxes.
High prices penalize the tourist industry, while the small size
of the average company and a management/ownership generation gap
are considered structural weaknesses even more important than
the lack of modern infrastructure.


2. On the positive side, according to ISTAT (National Institute
of Statistics) data, total exports increased 10.7 percent in
Emilia Romagna and 2.5 percent in Tuscany in the first six
months of 2005 compared to the same period in 2004. With
combined exports totalling 28.7 billion euros in this period the
two regions accounted for over 20 percent of Italian exports.
Higher investments in high tech are reported in Emilia-Romagna
with a focus on increasing productivity and re-launching their
world-famous products (packaging machinery, motor vehicles,
bio-medical equipment, tiles, etc.) through innovation and
improved quality. In Tuscany, where traditional industries
continue to suffer from increased Asian competition, and lack of
modern infrastructure, the focus is more on developing new
sectors and increasing industry/university cooperation in
research. End Summary.

Tuscany: a stagnating economy


3. According to Unioncamere (Union of Tuscan Chambers of
Commerce),industrial production in Tuscany declined three
percent in the first six months of 2005 compared to the same
period in 2004. Exports increased a mere 2.5 percent in the
same period, one of the weakest export performances among
Italian regions. Higher employment figures (up 1.4 percent in
the second half of the year compared to 2004) are likely a
statistical anomaly caused by the 2004 general amnesty of
illegal immigrants and an increase of temporary/flexible labor

contracts introduced by recent labor legislation. Wage
supplement benefits for temporarily laid-off workers increased
11.3 percent in the first seven months of 2005.


4. Industrial production continued to decline in two of the
leading industrial sectors in Tuscany: apparel and textiles
(down four and seven percent in the first and second quarters of
2005) and leather and leather goods (including footwear, down
5.6 percent and 3.8 percent respectively). Production also
declined in the gold jewelry and paper and cardboard industries.
Authorities attribute the drop in paper and cardboard
production to a decrease in competitiveness due to higher energy
and labor costs.

Tuscan government and Chamber of Commerce Efforts
"Full of Sound and Fury . . .


5. In a recent meeting, Tuscany President Claudio Martini
outlined three ways to improve Tuscany's competitiveness: 1)
Increase innovation by increasing funding for research and
encouraging university/industry cooperation; 2) Improve port,
airport, and highway infrastructure; and 3) Ease bureaucratic
and fiscal obstacles to foreign investments. Martini views
innovation and research as essential for Tuscany's small and
medium size producers since they can no longer compete with low
labor cost countries.


6. Martini mentioned cooperation between large textile firms in
Prato and Pisa university labs in the study of a fabric that can
"eat smog particles" and release them during washing. Looking
ahead, he wants to establish cooperative agreements between
Tuscany's five universities (Florence, Siena, Pisa, and Pisa's
Normale and Sant'Anna schools) and U.S. universities in order to
increase research and innovation in his region. The Province of
Florence has similar plans for promoting cooperative R&D efforts
between the private sector and universities.


7. In 2005, the regional government allocated 270 million euros
to sustain the fashion, machine tools, and shipyard industries
(53 million); industries that invest in research and development
(18.5 million),and/or in product innovation (95 million.) An
additional 90 million euros have been allocated to improve
infrastructure and create research and service centers for the
transfer of technology.


8. Tuscany Confindustria (Association of Italian Industries)
President Sergio Ceccuzzi believes bureaucracy, lack of
infrastructure, and limited investment in research are Tuscany's
"weak" points. Confindustria has been promoting a yearly
"Innovation Week" since 2003, in the hope of stimulating
investments.


9. Luca Mantelassi, President of the Florence Chamber of
Commerce, emphasizes the importance of research and
knowledge-based companies for the future of the local economy.
In particular, he wants to promote partnerships between the
biotech research center at the University of Florence and
American universities and biotech companies. The center has
developed several new technologies, particularly in molecular
diagnostics and new drug discovery, but will need partners to
bring these technologies to commercialization.


10. The Chamber of Commerce has also created "Firenze
Tecnologia," a special agency aimed at supporting economic
growth in high-tech sectors. Firenze Tecnologia has an
innovation manager responsible for making connections and
facilitating partnerships between universities and local
companies. Firenze Tecnologia also has a showroom dedicated to
new materials for the apparel/textile industries and other
industries developed by institutions and companies in this area.


11. Mantellassi believes that Italian firms can compete in
high-end and medium priced products provided they have
innovative products keep their costs down. The Florence Chamber
of Commerce has launched an "incubation project" aimed at
helping traditional industries increase their exports by
providing a company with know-how and the personnel to improve
marketing in foreign markets. Companies can use the "incubation
project" at no cost for 2-3 years. If exports increase, the
company pays a fee according to the volume of its exports.

. . . but signifying nothing."
Eli Lilly: A case in point


12. Eli Lilly Pharmaceuticals recently decided to make an
investment of approximately $150 million for the conversion of
its existing plant in Florence to a state-of-the-art production
facility for human insulin. Company managers reported they
received little support from national or local officials,
despite the fact that no other major pharmaceutical company had
made an investment of this size in Italy in over ten years.
Managers said that they made the decision almost exclusively out
of loyalty to their workforce. In competing for the investment
with other nations, Italy came up short in terms of economic
incentives and overall ease of doing business. Lilly officials
also said Italy is not a main destination for investment due to
the difficult business climate faced by these industries,
particularly in their dealings with the National Health System.

New ideas to reduce bank-financing costs


13. The banking system works well only for large companies,
according to Tuscany Confindustria President Ceccuzzi. He
believes banks should take measures to make their services more
available to small to medium size companies, which suffer from
difficult and expensive access to credit, an increasingly
important issue in the larger, global markets. In order to
support its members in their relations with the banking system,
the Tuscan chapter of Confindustria established a company
earlier this year with the purpose of training members in
negotiating with banks. The company's capital is private, and
no partner can own more than three percent of the shares. The
company, which employs one of the top financial experts in
Tuscany, acts as financial advisor to Tuscany Confindustria's
small and medium sized members. It offers its services at a
"success fee", i.e. at no cost for the small manufacturer if it
fails to negotiate better conditions with the banking system.
Two companies have already benefited from this initiative.

Emilia-Romagna: signs of growth after a period of stagnation


14. According to the Association of Small Industries,
Emilia-Romagna GNP is estimated to total 120 billion euros in
2005, up 0.6 % from the previous year, one of the better
performances among Italian regions this year. In addition,
according to ISTAT, the value of the region's exports in the
first six months of 2005 increased 10.7% from the same period of
2004, the best regional performance in Italy. Emilia-Romagna
exports exceeded 18.1 billion euros in this period, the third
highest among Italian regions.


15. A recent study by Milan's Politecnico University notes that
Emilia-Romagna has the largest number of high-tech companies
after Lombardy and Piemonte, and leads in terms of company
longevity, growth, business volume and average number of
employees. The study states this will likely form the basis of
improving economic growth in the future, since product
innovation and productivity improvements are viewed as key to
emerging from economic stagnation. Business associations give
the Regional Government credit for stimulating cooperation
between university and industry in research, which contributed
to the growth of high tech companies in the region. Biomedical,
precision apparatus, and high tech mechanical products are
listed as some of the best performing sectors, while "mature"
industries such as apparel and ceramic tiles are suffering from
foreign competition.

Local Governments sustain industry


16. Bologna Confindustria Director Giuliano Gotti believes that
the performance of Emilia-Romagna's high tech companies and the
growth in exports are positive developments, but says the
difficulties of family-owned, small and medium size companies,
the backbone of the local economy, are still serious. His
opinion, shared by most business leaders in the consular
district, is that undercapitalization, lack of easy access to
capital markets, and generational change in management and
ownership structure are obstacles to success in the global
market. New generations of manufacturers are less motivated
than their ancestors and too often put their company earnings in
real estate (as they put them in state bonds 15 years ago at the
peak of interest rates) rather than in R&D. When modern
technology, capital, and governance policies are followed, he
told us, local companies continue to excel and compete
successfully in many sectors


17. Gotti confirmed that regional government policies
compliment industry efforts by favoring industry/university
cooperation in research and especially by concentrating
decreasing public resources on those sectors that have a chance
to compete in international markets. Likewise, the Bologna
Chamber of Commerce reports several regional-sponsored projects
aimed at promoting competitiveness:

"Piu'" brings small and medium-sized companies into the
university to study the development of new products and the
patent process;
"Hi-Mec" forms technology transfer partnerships between
academia and the business community, particularly in the field
of mechanical products;
"PRAI" promotes the development of the healthcare technologies
industry and the biotechnology sector in the area.

The European Commission has recognized the region's Agency for
Technological Development (ASTER) achievements by bestowing the
'Award of Excellence' on the Region of Emilia-Romagna for the
creation and development of innovative enterprises.

Labor Unions cooperate, including CGIL


18. While some local labor union leaders continue to defend
industries for ideological reasons, criticize restructuring, and
fight relocation, other realize that the good times are over and
are willing to look into new ways to promote economic growth.
During meetings organized by business associations or
center-left think tanks, CGIL (largest, leftist oriented Italian
labor union) representatives urged local authorities to promote
university/industry cooperation (a scandalous suggestion until
recent years in the heavily politicized Tuscan and
Emilia-Romagna Universities),to assist industries that invest
in research, and to increase deregulation (with a view to
reducing financial revenues vis-`-vis production revenues.)


19. Comment: While business leaders and economists point to
"external" issues such as the strength of the Euro, unfair Asian
competition, and counterfeiting as important reasons for the
loss of competitiveness of Tuscan and Emilia-Romagna products in
their still large, traditional industries, "internal" weaknesses
are increasingly cited as equally if not more important factors.
The decline of productivity is viewed as a major problem, and
it is attributed to the delay with which information and
communication technologies are adopted or efficiently utilized
by local producers. This fact appears to be particularly
significant in regions, such as Tuscany (less so in
Emilia-Romagna) that specialize in traditional industries, which
benefit less from these technologies. Other structural
weaknesses, such as the companies' small size, the generational
change, and the lack of modern infrastructure in Tuscany appear
as formidable obstacles to sustained economic recovery.


20. Comment continued: The recent increase in exports by
Emilia-Romagna producers appears to be a consequence of the
region's investment in high technology but also of the upward
trend of the dollar in 2005. We found no one willing to
consider it a significant step out of stagnation. However, we
also noticed a much greater awareness among public
administrators and management/labor leaders in both regions that
the good times are over. As a local Tuscan public administrator
put it, "we have seen many small artisans and shop owners close
down in the last two years, but we have seen no noticeable
increase in the number of pension applications. This means that
people unable to compete in traditional activities are still
willing to try and make it in new areas." End Comment.
DEMPSEY