This record is a partial extract of the original cable. The full text of the original cable is not available.

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