Saturday, April 5, 2008

Europe's own Banana Republic

Imagine a country where the Prime Minister controls all major media outlets and can personally have anything censored he dislikes. When the censorship gets criticized internally, he just simply removes the entire board of the largest media company in the country, as he is the owner.

Furthermore one of the largest companies in the country had gone bankrupt due to false accounting. However due to new laws passed by this Prime Minister which weakened protection against false accounting it was extremely difficult to retrieve any money from this fallen company, mainly to protect his own Media Empire from scrutiny regarding similar accounting mishaps.

No this is not Venezuela, Cuba or Iran...

In the past decades Britain and then Germany had the 'honour' of being handed the title of 'The Old Sick Man of Europe'. Since several years though Europe has a new patient, and a seriously ill one at that; Italy...

With one of the lowest economic growth rates in Europe, one of the highest deficits (and ever increasing), high unemployment rate, low education levels, etc etc, Italy is truly in bad shape. Having been drastically overtaken by Spain and is starting to feel the pressure from countries such as Portugal and even Greece who are growing at a relatively healthy pace something is clearly wrong in the Land of the Romans.

At first it seemed as though Italy was experiencing similar problems as France, Germany and Britain had in the past as the old, large economies in Europe which were more difficult to 'turn around' than for example a Dutch or an Austrian economy. However when in 2005 it became clear Italy was actually the only country in the EU to have fallen into a recession, the symptoms of the Old Sick Man of Europe were stronger than ever.

Now with the emerging markets, such as India and China, succesfully competing with 'old' industries in Europe the problems are getting worse by the day. While most European governments are stumbling over each other trying to get new, innovative companies up and running as fast as possible in order to create new sources of income and employment and compensate for the loss of traditional industrial work to the emerging markets, Italian companies and the government are focusing all their efforts on protecting their own national market.

According to the latest figures Italy's innovation performance is one of the lowest in Europe well behind countries such as Sweden, Finland, The Netherlands, and yes...also the UK, France and Germany, the former Old Sick Men of Europe. Another interesting comparison is the time required to open a new business in EU countries; in the Netherlands it take 1-2 days, in Denmark around 2 days, in Italy...2 months at least.

By obstructing new, innovative companies of entering the market while simultaneously relying on the traditional small- to medium-sized industrial companies, Italy has put itself in an extremely vulnerable position and is currently surviving mainly because of its relatively prominent position in the EU market. However, due to the inefficiency of many of the Italian national ‘champion corporations’ foreign companies are trying to buy up the companies for pocket change. The emphasis lies on “trying” as the Italian government is doing all it can to avoid foreigners from buying up the top layer of the Italian economy (Antonveneta, Alitalia, Banca di Roma, etc.)

If we look at the example of Alitalia we see a state controlled airline which has last reported a profit in 1998 and ever since has been losing a million Euros...a day. How can the company still be operating you might think; it’s quite simple, it is the airline of Italy and therefore the pride in the sky of the Italian people. At least, that’s what it is supposed to be, but by now the Italian tax payers have poured several billion Euros of tax money into the company and it’s still a huge mess. Alitalia currently has one of the oldest fleets in Europe and has a EU ‘domestic’ market share of under 3%.

Air France – KLM has come forward as the company to bail out Alitalia and buy the company for a symbolic amount of a million Euros from the Italian government. This would solve the problems of the company and finally remove the parasite from Italian wallets.

There was a problem though, the unions. The Alitalia unions managed to block every suggestion of necessary job-cuts by Air France – KLM. The unions proved to be so stubborn that the entire Exec team of Air France – KLM packed their bags last week and returned to Paris not wanting to talk to Alitalia anymore. They had had enough of the spoiled Italian unions who just did not want to understand the simple fact there was no way for the company to become profitable without restructuring the entire company. At the same time Berlusconi commended the unions on wanting to keep all the jobs within Alitalia and on top of that said he was convinced an Italian party would understand the unions much better than the French and was therefore trying to get an Italian buyer on board.

This is exactly the problem in Italy; the large companies are used to being protected by the government and are used to having huge sums of money poured into the company to keep it alive without having to deliver anything.

On the one hand Italy wants to be a big player in the EU while on the other they have one of the most protectionist economies in Europe. Unfortunately these systems do not go in hand very well. If the government can not get its act together in order to reform the economy into a truly liberal economy to be a significant player in the international markets, the country will bankrupt itself.

One of the main reasons many Italians support the government in protecting the national champions is simply because of national pride. What they might need to be told is that the percentage of total taxes in Italy paid by the average Italian taxpayer that go to supporting these ‘national champions’ is one of the highest in Europe if not the World at the moment.

Now let’s hope for Italy’s sake and for Berlusconi’s fate, Air France – KLM will return to the negotiations...