VZCZCXRO7412
RR RUEHFL RUEHNP
DE RUEHMIL #0078/01 0821618
ZNR UUUUU ZZH
R 231618Z MAR 09
FM AMCONSUL MILAN
TO RUEHC/SECSTATE WASHDC 1733
INFO RUEHRO/AMEMBASSY ROME 8774
RUEHFL/AMCONSUL FLORENCE 0198
RUEHNP/AMCONSUL NAPLES 0196
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 MILAN 000078 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV EAGR PGOV IT
SUBJECT: NORTHERN ITALIAN "DISTRETTI" FACE THE GROWING 
CRISIS 
 
¶1. (SBU) Summary: Across Italy's industrial northern 
heartland, we've heard the same message with respect to the 
economic crisis in recent weeks: we're holding on, but won't 
last forever.  Northern Italy's economy is dependent on 
clusters of "distretti," each with dozens of small firms that 
produce one thing, largely for export.  As export markets 
have sagged, many of these "distretti" have suffered. 
Fortunately, credit still seems available for smaller firms 
with good ties to their local banks.  Also, small and 
medium-sized firms are flexible enough to make adjustments 
(to their labor force or with innovation) to keep afloat in 
hopes of waiting out the tough times.  The real concern is 
that the demand slump extends into next year when the 
worst-hit "distretti" may start to go under.  This could 
potentially cause serious localized unemployment problems, 
and a political backlash against the central government, in 
cities across northern Italy.  End summary. 
 
Distressed "Distretti" 
 
¶2. (U) To compile a snapshot of how the economic crisis is 
starting to bite in the industrial heartland of Italy, the 
Consul General recently traveled to Udine (in Friuli), Parma 
(Emilia Romagna), and Verona (Veneto).  Rather than hosting a 
small handful of large employers, Italy's north is home to a 
number of "distretti" ) concentrations of dozens of 
export-oriented small and medium-sized enterprises (SMEs) 
focused on one industrial sector. 
 
¶3. (U) The primary message that came through from our various 
meetings was that the situation is worrisome for nearly all 
the "distretti" ) we spoke primarily with ones that produced 
foodstuffs, furniture, textiles, and steel products. 
According to a trade association in Udine, already five 
percent of SMEs in its area of coverage have gone bankrupt. 
However, the consensus was that things had not yet become 
disastrous. 
 
Good Products, No Buyers 
 
¶4. (U) Considering the export nature of the "distretti," the 
number one topic on the minds of businesspeople and local 
officials was the perilous condition of traditional overseas 
markets in Europe, the United States, and Asia.  As the level 
of exports ) especially to the EU 27 ) continues to dive 
nationwide these firms are questioning their ability to 
replace lost international consumption with increased 
domestic purchases. 
 
¶5. (U) One producer of fabrics for use in the automobile 
industry said that orders were still being fulfilled, but 
that buyers in Europe and the United States were unable to 
pay the invoices.  A specialty steel producer told us that 
his order books were still OK, but only for a scant few 
months into the future.  On a more positive note, producers 
of wine in Veneto and Friuli told us that their sales were 
still decent, but that sales of high-end wines were down. 
Many makers of foodstuffs (pasta, olive oil, Parma ham, and 
San Daniele prosciutto from Udine) said they were actually 
looking to expand their international market presence.  The 
one thing they feared was an uptick in protectionist 
sentiments in favor of domestic agricultural interests. 
 
¶6. (U) Indeed, the inconsistent impact of the crisis across 
various export sectors is, thus far, a good sign for whole 
regions ) though not for the smaller, undiversified 
"distretti" within a region.  Recent data released for 
Lombardy, which can be extrapolated to some degree for the 
regions we visited, showed that those "distretti" producing 
things like foodstuffs, machines, and pharmaceuticals were 
actually prospering.  Meanwhile, those relying on textiles, 
wood and woodworking, and vehicles were suffering 
inordinately.  Likewise, those who had primary export markets 
in the United States and Asia were much better off than those 
who looked mostly to consumers in Europe. 
 
Small is Better 
 
¶7. (U) Another area of concern for the entrepreneurs with 
whom we spoke was financing.  A senior banker at a large 
national institution here in Milan claimed that his bank is 
still offering loans and that the problem is more of demand 
(no sales so companies don't need to expand) than supply of 
credit.  Outside of Milan we heard essentially the same 
message.  Industrial associations and individual 
 
MILAN 00000078  002 OF 002 
 
 
entrepreneurs told us that, for now at least, they can still 
rely on longstanding relationships with small, regional banks 
for infusions of credit.  However, entrepreneurs ) even 
those with medium-sized firms ) told us they were reluctant 
to take on additional debt burden (or take out a loan for the 
first time), preferring to get through these lean times using 
built-up savings and creative workarounds. 
 
¶8. (U) In fact, many pointed to the adaptability of SMEs, 
compared to their larger contemporaries, as a potential 
saving grace for their "distretti."  Because these firms have 
more flexibility in adjusting their staffing, they can reduce 
costs more easily than larger firms.  However, none predicted 
major spikes in unemployment as SME representatives were 
reluctant to fire skilled employees.  Since these "distretti" 
are so focused on one area of production, someone laid off 
(rather than placed in temporary "cassa integrazione" to 
which most of these smaller firms have no access) would 
likely have to leave town to find work, and thus not be 
available when and if the company wanted to hire them back. 
 
¶9. (U) SMEs are also better able, funding permitting, to 
innovate to improve productivity.  A research center in 
Friuli, together with the University of Udine, for example, 
is working with entrepreneurs producing chairs (a key local 
"distretto") to rationalize their production.  One trade 
association told us they hoped, in fact, that the economic 
crisis would provide a spark to encourage local SMEs to merge 
or otherwise become more efficient. 
 
Comment: Approaching the Waterfall 
 
¶10. (SBU) Most of our entrepreneur contacts tell us they are 
getting by for now and aren't planning anything drastic. 
However, even the most optimistic said they can't last in 
such a state for much longer.  Should the crisis extend much 
beyond 2009, we would expect the hardest-hit "distretti" to 
start failing ) a phenomenon that would hollow out towns 
that rely on this undiversified model, and make the economic 
crisis increasingly a political one for Rome.  People with 
whom we spoke were very supportive of attracting foreign 
investment as a way to help reposition the "distretti" to be 
more competitive in difficult times.  However, there was 
general pessimism that the central government in Rome would 
react to the north's economic woes by improving the nation's 
poor investment climate. 
WEYGANDT