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May 15, 1998

For Italian Businesses, the Euro Prompts Hopes and Fears

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    VICENZA, Italy -- Giovanni Franco Masello sheds no tears over the imminent demise of the Italian lira. Pietro Montagna sometimes wishes the funeral could be delayed a bit.

    Credit:The New York Times

    Both are Italian businessmen, and both want the euro, Europe's nascent single currency, and the benefits it will ultimately bring for their companies. Yet they are preparing for it in very different ways.

    Masello's pottery company, which is not far from this northern Italian city, some 40 miles west of Venice, will post prices for its products in both lire and euros when it issues new price lists later this year. But the supermarket chain based in Milan where Montagna works is asking the Government in Rome to slow things down. Instead of issuing customer receipts in both lire and euros in the transition phase to the new currency that begins next Jan. 1, as the Government has asked, the chain wants the receipts to be only in lire until the euro is fully introduced in 2002.

    Deroma S.p.A., the pottery maker where Masello is chief executive, is embracing the euro because it is one of thousands of thriving small and medium-size companies in Italy that have already become regional and international players, a status and a strategy that the euro is intended to enhance. With the euro, the burden of converting the lira to a dozen different currencies will disappear, and as the single currency pushes Europe to become even more integrated economically, Deroma is poised to grab a bigger chunk of the market than it has now.

    "Our idea," Masello said, "is for a production site in every country in which we sell."

    But Standa S.p.A., the big supermarket chain where Montagna is head of computer services, is in a sector under siege. Long shielded from real competition by the kind of protectionist policies that the euro is intended to bring down, the Italian retail trade, along with banking and other sectors, expects mainly pain, at least in the near term. Converting cash registers and consumer behavior to the new money will be costly. What is more, the expense is coming at a time when Italian retailers are already under assault from big competitors elsewhere in Europe that are expanding here.

    Similar contrasts in expectations are being felt throughout Europe as companies and industries prepare, from different starting points, for the euro, which will replace the currencies of 11 countries in the European Union. But in few countries are the differences as stark, or the potential gains and wrenching costs as substantial, as they are in Italy. Indeed, looming over both ends of the economy here, the strong and the weak, are the special uncertainties of Italy S.p.A.

    Credit:The New York Times

    To qualify for admission to the European monetary club, and thus become eligible to use the euro, Italy had to cut its budget deficit sharply. That meant raising income taxes on corporations that had already been paying the highest rates in Europe. It also meant paring investments in transportation and communications, even though those still fall well below the northern European standard.

    Then there is Italy's depressed south, with its high unemployment rate, which is a millstone around the neck of the economy as a whole. Germany has its depressed east, and Spain its pockets of backwardness. But interest charges on Italy's bloated national debt, which is double the target set for countries adopting the euro, pre-empt the kinds of spending programs Germany began in the east after the fall of the Berlin wall.

    What all this means, of course, is that if the current downward trend in interest rates reverses and the cost of money begins to rise again, Italy will have to tighten its belt further, even at the risk of provoking an economic slowdown, higher unemployment and social unrest. Resistance from labor unions, and from leftist parties within the Government itself, would be intense.

    Credit:The New York Times

    Little wonder then that Antonio Fazio, president of the Italian central bank, warns that the next few years will be "purgatory" for Italians as the economy adjusts to European demands and is forced to adapt.

    What is encouraging to the experts are the number of businesses, like Deroma, that seem as well positioned as any in Europe to meet the challenges the euro will pose.

    Deroma, the world's largest pottery maker, expects revenue of $91 million this year, a fivefold increase from a decade ago. Founded in the 1950's by local potters, Deroma single-handedly industrialized pottery production in the 1970's and then reinvented itself as a mini-multinational.

    In the early 90's, Deroma pushed aggressively beyond Italy's borders, grabbing back the marketing of its products in Europe and the United States from local distributors and then building or acquiring factories in Denmark, China and, most recently, the United States. Now, virtually all the terra-cotta pottery found at big American retailers like Home Depot and Wal-Mart originates in Deroma kilns.

    Companies like Deroma are the very backbone of the Italian economy, said Franco Bruni, an economist at Bocconi University, the business school in Milan. "These concentrations of small and medium-size companies with flexible structures are among the best" on the Continent, he said, and the euro will be a boon for them.

    For many, he said, it will afford "emancipation from the costs of small Italian banks" while fostering cross-country networking, particularly in areas like those around Vicenza that are close to powerful economic regions farther north. By removing obstacles to companies' expansion, such as the cost of protecting themselves from changes in exchange rates, the euro will promote expansion across borders into neighboring countries.

    But the chronicle of Deroma's growth also illustrates many of Italy's deficiencies.

    Wages in Italy are so high that Masello, Deroma's chief executive, had no inhibitions about moving production abroad, concentrating the manufacture of labor-intensive painted pottery in China, for example, and acquiring a pottery maker in Marshall, Tex., last year.

    Italian banking is so costly and provincial that to finance Deroma's growth, Masello took the very un-Italian step of selling shares on the Milan stock exchange, thus avoiding the debt that makes Italian companies, as he puts it, "the salvation of the banking system." (Deroma is one of only two of the 2,200 industrial companies in the Vicenza area listed on the Milan bourse.) Even then, to manage the stock sale, he chose Deutsche Morgan Grenfell, the investment banking arm of Germany's Deutsche Bank, though he also brought into the syndicate Credito Italiano, one of the best-run Italian banks, "to include a national bank."

    And so rigid is the Italian labor market, and so immobile have Italians become thanks to generous welfare and unemployment payments, that despite unemployment of more than 20 percent in the south of Italy, Deroma employs 40 to 50 non-Europeans, mainly from India and Africa, among its roughly 1,500 workers.

    Still, not all of Italian business shares Deroma's dynamism, and what troubles some experts is the relative weakness of key sectors of the economy, like banking. To cushion that industry, Italy long maintained high barriers to foreign entry. Now the euro is expected to open the floodgates to foreign capital.

    Luigi Spaventa, a former Finance Minister who is chairman of a regional Tuscan bank, Monte dei Paschi di Siena, said Italian banks were so burdened by Italian bureaucracy that it could take up to 10 years to recover a loan gone bad.

    That will prove costly when the euro arrives, he said. While the local banks may hold on to less profitable businesses, like retail banking, they could well lose more lucrative activities like wholesale banking, investment banking and financial products to powerful foreign competitors. "There will ultimately be casualties," Spaventa said.

    The retail trade is equally fragile. Long protected by a Government that favored small family-owned distribution, thousands of mom and pop stores now face a shakeout. Though the stores may be part of the charm of Italian cities, their inefficiency and high prices fuel inflation and dampen consumption. Already, foreign supermarket chains like Auchan S.A. of France have begun invading northern Italy.

    To defend their turf, Italian chains are banding together. Standa, which is controlled by the holding company Fininvest S.p.A., recently joined a purchasing alliance with two other supermarket groups. Even thus united, they are dwarfed by European rivals. While Tengelmann Warenhandels of Germany, best known in the United States for its A.& P. supermarkets, has $40 billion in annual sales, Standa and its partners together account for only $8.5 billion.

    "In Italy, the first five supermarket groups together do less business than Tengelmann," Standa's Montagna said.

    Moreover, the debilitating north-south divide remains. While Carlo Azeglio Ciampi, the current Finance Minister, says that reviving the south is his highest priority after the euro, executives like Masello are skeptical.

    Asked whether Deroma would invest in southern Italy, Masello complained of excessive production in the country, where 70 percent of Deroma's pottery originates. Wages in the south roughly equal those in the north, he noted, despite lower productivity, making operations there prohibitively expensive. Add to that the region's poor railroads and highways, and the reason for his refusal is clear. He envisions instead a Europe-wide investment program for depressed regions.

    The struggles of the Italian south, some experts warn, will also keep the pressure on politicians to relax the Government's austerity program. In Naples, the capital of the Campania region, where the 26 percent joblessness rate is more than double the national average, tens of thousands of people marched in the streets in March to demand jobs.

    The immediate social cost to Italy of the euro will be high, said Sergio De Nardis, an economist at Confindustria, an industrialists association. "The benefits will come only in the medium to long term," he added. The simple truth, he said, is that old habits of protecting and cosseting industries die hard.

    Sometimes, even issues of prestige get in the way.

    That happened recently when the struggling national airline, Alitalia, said that it would shift about 10 percent of the flights that now depart from Rome to a new airport being built near Milan. The change was intended to lure back Italian business travelers in the north who now find it easier to go to Frankfurt or Zurich, and fly with Lufthansa or Swissair, than to trek south to Rome.

    The Foreign Ministry begged the Government to intervene and reverse the decision. Lamberto Dini, the Foreign Minister, complained that the shift in flights, besides taking business from Rome, would "provoke not a little embarrassment for the image of Italy."

    Only after it became clear that reversing the decision would jeopardize a crucial alliance between Alitalia and the Dutch carrier KLM did the Government silence Dini and give profitability priority over image.

    Though such persistent political intrusions are disheartening, De Nardis said, the prompt Government refusal was also reassuring, illustrating a growing gap in Italy "between rhetoric and reality."

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