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Wednesday, September 12, 2012 4:01 PM

Why OMT Cannot Possibly Solve Anything; Monti Warns Italian Unions; Over 200,000 Jobs at Risk; Italy's Insane Labor Rules

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Amazing discrepancies in small business employment in Italy vs. the rest of the EU will go a long ways towards explaining why Mario Draghi's OMT plan to "save the euro" cannot possibly work.

I pieced the following analysis together after reading some interesting comments on Eurointelligence in today's Daily Morning Briefing.

Monti Warns Italian Unions

Mario Monti warned Italian labour unions during a meeting in Rome that time was running out for action, government sources told ANSA. "Greece, Spain, Ireland and Portugal have boosted productivity and lowered labour costs, turning around a negative trend, while Italy has not improved productivity and has increased labour costs," Monti said. An effort for concrete results is urgently needed from talks between business leaders and unions, Monti told to the union leaders. But the biggest Italian union CGIL said "growth cannot come on backs of workers alone." Monti reminded unions that only a few weeks remained before the eurogroup and EU summits in October. The premier called for concrete signals within a month.

Over 200,000 Jobs at Risk in Italy

Italy’s main small business association found that Italian SMEs may be cutting 172,000 jobs, the lionshare of all jobs at risk in Italy from the recession,  La Repubblica reports. Yesterday, the CGIA reiterated that idea. Italy risks having an additional 202,000 people unemployed in the second half of this year, relative to the same period in 2011, CGIA data shows. The association says the tax burden was the main problem - at over 60% for SMEs, and over 55% on average for Italian companies.

The Five Star Movement Established Itself as Italy’s Third Party

The Movimento 5 Stelle (M5S) has entrenched its position as the third Italian Party, according to several polls appear on Il Fatto Quotidiano. The last poll (Ipsos) shows that the Silvio Berlusconi's party PDL is the second one in Italy, with 21.9%. The first is PD (Partito Democratico) with 25.4%. Beppe Grillo’s Movimento 5 Stelle comes in at 17.9%. Italian analysts compare the M5S to the Greek Syriza. It is opposed to the euro, to austerity, to the ECB, and wants to regain sovereignty on monetary policy, and favours a default (Icelandic way), followed by devaluation.
Understanding SMEs

Inquiring minds (mine) had to look up the word "SMEs". It stands for small and medium sized businesses.

Micro businesses have fewer than 10 employees, small businesses fewer than 50 employees, and medium businesses under 250 employees.

Please consider this EU SME Fact Sheet

SMEs in Italy – A Brief Fact Check

There are approximately 65 SMEs per 1000 inhabitants in Italy, which is substantially above the EU27 average of ca 40. In line with this, the relative importance of SMEs for the Italian economy exceeds by far the EU average, as illustrated by a considerably above-EU-average share of persons employed and value added accounted for by SMEs. It should be noted, that this elevated importance is mainly due to the micro enterprises, while medium enterprises are, in fact, underrepresented vis-à-vis the EU average.

Italy SMEs

click on chart for sharper image

Italy SMEs vs. EU

  • 94.6% of Italian businesses are "Micro Businesses" vs. EU Average of 91.8%
  • 47.1% of Italian employment is by "Micro Businesses" vs. EU Average of 29.6%

Note those amazing differences, especially point number two. I will explain why in detail below, but union work rules are at the very heart of it all.

The SME comparison stats are from 2005, but if anything, I expect they would be even more lopsided now.

Italy Labor Force

Italy has an estimated Labor Force of about 23 million.

Unemployment Rate in Italy

A loss of 200,000 jobs would raise Italy's Unemployment Rate by about .9 percentage points, from 10.7% to 11.6%.

Italy's Insane Labor Rules

In searching for material on SME's I came across the Wall Street Journal report Employment, Italian Style which helps explain Europe's economic crisis. Here are a few key snips:
Imagine you're an ambitious Italian entrepreneur, trying to make a go of a new business. You know you will have to pay at least two-thirds of your employees' social security costs. You also know you're going to run into problems once you hire your 16th employee, since that will trigger provisions making it either impossible or very expensive to dismiss a staffer.

But there's so much more. Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include stress that is work-related or caused by age, gender and racial differences. You must also note all precautionary and individual measures to prevent risks, procedures to carry them out, the names of employees in charge of safety, as well as the physician whose presence is required for the assessment.

Now say you decide to scale up. Beware again: Once you hire your 16th employee, national unions can set up shop. As your company grows, so does the number of required employee representatives, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties. Management must consult these worker reps on everything from gender equality to the introduction of new technology.

Hire No. 16 also means that your next recruit must qualify as disabled. By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way, or else your company owes fees in-kind.

Once you hire your 101st employee, you must submit a report every two years on the gender dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact.

Businesses with no more than 250 employees may also still be enjoying their three-year profit-tax holiday, which was granted in 2010 for small and medium-sized firms that reinvest their profits in forging "networks" for "innovation" with other small businesses nearby.

All of these protections and assurances, along with the bureaucracies that oversee them, subtract 47.6% from the average Italian wage, according to the OECD. Two-thirds of that bite comes before payroll, meaning many Italian workers are unaware of their gross cost to employers.
Tax Holiday Ends

Note the second to last paragraph above regarding the end of the three-year profit-tax holiday on SMEs.

Italian unemployment is going to soar.

Structural Problems

The EU nannycrats and officials at the ECB think the problem in Europe is one of interest rates. The above analysis clearly shows something else.

The first structural problem is preposterous labor work rules in Italy, Spain, and Greece.

The second structural problem is the ECB and the euro itself. One size interest rate policy cannot possibly work in a mix of cultures and work rules.

Instead of fixing work rules or breaking up the eurozone (both are needed), the nannycrats in Brussels want higher taxes, the socialists in France want higher taxes, and the radical left parties want more stimulus and no pension reforms.

Mario Draghi's OMT cannot possibly fix anything.

If "progressives" and union advocates in the US had their way, we would be in the same shape.


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