Italy Is Haunted by the Pain of Past Economic Crises
TREVISO, Italy — In the flat plains of Italy’s Veneto region, in a small town about 20 miles north of Venice, Antonio Carpenedo has been developing unusual methods of making cheese. At La Casearia Carpenedo, wheels of cheese are dunked and aged in wine — red, white and Prosecco — while others are covered in hay and aged in barrels.
Mr. Carpenedo built this “drunken cheese” company out of the debris of financial disaster. In the 1980s, rising interest rates shattered his previous cheese-making business. “They bled us dry,” he said, recalling rates of 27 percent. The business had to be sold, and he started over.
Today, fear of another financial catastrophe triggered by rising interest rates and economic uncertainty haunts his sons, who run the company, and has paralyzed their investment plans.
“The rates are increasing, and we do not know what will happen,” said one of the sons, Ernesto Carpenedo. “If we reach the rates that we had in the ’80s, it’s devastating, and you basically kill the company.”
For the past decade, interest rates in the 19 countries that use the euro have been at record low levels, and the European Central Bank has designed programs to encourage banks to lend generously to businesses. Now, with inflation surging across the bloc, the central bank is changing tack, tightening financing conditions in preparation for the European Central Bank’s first increase in interest rates in 11 years, which is set to happen on Thursday.
This change is being felt acutely in Italy, the eurozone’s third largest economy and a frequent source of political and economic headaches for the region. The central bank’s withdrawal of easy money over the past few months has resurrected investors’ unease about Italy’s high level of debt and its commitment to economic reforms.
Last month, yields on the government’s debt, a measure of a country’s borrowing costs that also serve as a benchmark for other loans, rose sharply. At about 150 percent of gross domestic product, Italy’s debt burden is the second highest in the eurozone.
Italy “is systemically important to the monetary union because of its size,” said Sarah Carlson, the lead analyst for Italy’s sovereign rating at Moody’s.
Rising borrowing costs are beginning to emerge as a concern across the continent. The European Central Bank has acted later than many of its international counterparts to address inflation, citing the fact that most of the price pressures have been “imported,” the result of global supply chain disruptions and rising energy charges exacerbated by the war in Ukraine. Now, amid signs that large price increases risk becoming entrenched in the economy, policymakers have been pushed into action.
In Italy, companies are used to navigating long stretches of lackluster economic growth and political upheaval. What is new is the sudden burst of inflation and the end of ultralow interest rates.
Since the euro was introduced a little more than 20 years ago, inflation and interest rates have been low, making it easy to find the resources to expand, said Livio Libralesso, the chief executive of Geox, the footwear brand founded in 1995 in Montebelluna. The city has become a hub for shoe production in the Veneto region.
Companies no longer needed to battle devaluations of the lira or large fluctuations in currency value with neighboring countries, and Geox could focus on innovation. It was “a sort of heaven,” he said.
The euro’s weakness has been intensified by worries that Europe will drop into a recession because of energy supply disruptions. But Italy’s outlook is particularly challenging. The European Commission forecast that Italy will have the slowest economic growth in the bloc next year, just 0.9 percent, because of a decline in consumer spending as households cut back, and less business investment because of weaker demand and increasing cost of borrowing.
There is a risk that Italy’s outlook could turn even worse because of the country’s dependence on Russian energy. Before Russia invaded Ukraine, Italy got 40 percent of its imported gas supply from Russia; that has been cut to about 25 percent.
Last week, with little warning, an era of political stability and economic reform came under threat: Prime Minister Mario Draghi’s technocrat-led coalition government appeared to be on the brink of collapsing after just 17 months, when Mr. Draghi tried to quit amid political stalemates.
“You can always trust Italian politics to throw a curveball,” said Federico Santi, an analyst at Eurasia Group. It raised the concern about whether a new government would continue to adopt the reforms needed to receive European Union pandemic relief funds, worth about 200 billion euros. The Italian parliament votes this week on the future of the government.
The Veneto region is an industrial area and famous for its Prosecco, but its resilience to economic downturns and political upheaval will be tested by the darkening outlook for the global economy.
In recent years the Carraro Group, which makes and exports parts for tractors, has steadily continued its recovery from the 2008 financial crisis, taking advantage of low interest rates to sell bonds to restructure its debt and then to invest. This year the company, outside Padua, planned to refinance some of its debt by borrowing €120 million, expecting to get better terms than the 3.5 percent it was paying on its earlier bonds.
But at 8:30 a.m. on the day Padua executives opened the book for orders, they had to shut it again. It was Feb. 24, and Russia had just invaded Ukraine. Now the company’s refinancing plan is on hold.
Still, the more pressing problem for the Carraro Group is the rising cost of running its business. The increase in gas and power charges would have cost the company €116 million this year if it hadn’t been able to use its financial trading department in Luxembourg to hedge against rising prices. Instead, energy will cost Carraro €5 million more.
“The moment is very difficult and very complicated,” said Enrico Carraro, the chairman of the company. “There are all the ingredients in this moment to have a big and deep crisis. Maybe the heart of the storm is not going to hit in such a strong way, but we must be ready.”
For smaller companies, there are fewer ways to hedge against rising costs. About 12 miles north of Carraro’s headquarters in Castello di Godego, Stocco, a manufacturer of metal furniture, has seen the cost of the iron it needs more than double since October.
CNA Treviso, an association for small and medium-size businesses in the region that also helps companies get credit at low rates, estimates that companies are experiencing cost inflation of between 15 percent and 25 percent. Most of that is due to high energy charges.
With so much uncertainty about the future of energy and commodity prices, it’s a challenge for businesses that have limited flexibility in setting prices to know what to do next. Gianpaolo Stocco, a co-owner of the furniture company, said commercial customers were awaiting Stocco’s prices for next year’s catalogs.
Prices could keep going higher, but “if I use the current price I could also be out of the market in 2023 if it goes down again,” Mr. Stocco said.
Inflation in Italy is 8.5 percent but Mr. Stocco expects the inflation his company experiences to continue to be even higher next year.
He’s telling customers that Stocco’s prices will rise 10 percent.
Expectations for such high inflation are bad for the central bank. The future path of inflation has a psychological component; higher prices can become self-fulfilling if companies and households expect them and set higher prices and demand higher wages in response.
Economists don’t expect interest rates to rise in Europe anywhere near the levels of the 1980s, when double-digit rates were the norm, as recession predictions grow and narrow the window for rate increases. But the combination of high energy prices, high inflation and slow economic growth has created huge uncertainty for businesses that cannot predict when supply chain disruptions will ease.
La Casearia Carpenedo, the cheese maker, expanded and invested rapidly during the period of low interest rates, borrowing to fit roofs with solar panels and build machinery to clean the barrels. Over the past decade, it has spent more than half a million euros on investments. Now, new investments have been put on hold, halting the family’s hopes of opening a school to train new cheese makers, buying land to grow its own grapes and creating an herb garden.
These challenges are layered on top of the existential questions businesses often ask themselves about the future of their industry.
At La Casearia Carpenedo, there seem to be two stark options: Return to small artisan producer or leap to large international company? “This is the question that we are assessing,” Ernesto Carpenedo said. But “it is not easy today to understand what will happen tomorrow.”
Elisabetta Povoledo contributed reporting from Rome.
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