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Thursday, June 27, 2002


One of the reasons I am a skeptic about the possibility of a sustained rise in the Euro against the dollar is that I just don't see the European companies as sufficiently dynamic or profitable to elbow aside their US counterparts. Here's one example of why I feel like this:

Fiat's long-term debt rating was downgraded on Wednesday to just a notch above junk status after Moody's Investors Services warned that the Italian industrial group's future could hinge on exercising an option to sell its automotive unit by 2004. Moody's downgraded some €15bn ($14.9bn) in Fiat bonds by one notch to Baa3 with a negative outlook. Moody's also recommended that Fiat carry through the restructuring plan's significant asset-sale and debt-reduction plans "in order to avoid pressure on the rating and limit the risk of a further downgrade".People who worked on the restructuring plan said Moody's actions were in line with expectations following numerous discussions with the ratings agency during the plan's elaboration.
Source: Financial Times LINK

In another part of the strong European reform story I don't buy, it's worth pointing out that Italy has the toughest restrictions in Europe on firing workers, according to the Organization for Economic Cooperation and Development.

Article 18 of the Labor Code, passed in 1970, mandates that after a short probationary period, an employee fired from a company with 15 or more employees can bring a lawsuit challenging the dismissal. If the suit is successful, as is often the case, the employer is forced to rehire the worker and pay back wages and social insurance contributions, as well as a large fine.

When given a hypothetical choice of a labor market where it is hard to find a job but hard to be laid off or one where it is easy to find a job but easy to be laid off, 71 percent of Italians preferred the former in a poll of 1,000 individuals conducted in April by Tito Boeri, an economist at Bocconi University in Milan, for the Debenedetti Foundation. So Italians value job security — and have lots of it.

Even worse, the uncertainty and expenses associated with dismissals have a chilling effect on hiring. A study led by Stefano Scarpetta of the O.E.C.D. released last week found that the average American company that survives two years increases its employment 160 percent, while the average Italian one that survives as long grows only 20 percent. Although many factors are undoubtedly at work, stiff firing restrictions probably account for some of Italy's lower job growth. Firing protections also affect worker performance. Examining data on 858 newly hired bank employees, Andrea Ichino, an economist at the European University in Florence, found that the absenteeism rate more than doubled after workers had completed the three-month probationary period. "The cost of the job security of the father," Professor Ichino argues, "is the insecurity of the son." Italy's jobless rate hovered around 10 percent in the last decade. Because its safety net has as many holes as Swiss cheese, high unemployment contributes to the remarkable fact that more than half of people in their 20's — and nearly a quarter of men age 30 to 39 — live with their parents. "The family is the main institution that provides unemployment insurance benefits," Professor Ichino said."

Source: New York Times LINK

And bearing in mind that Italy is soon about to enter into serious competition with Japan as to who is going to be the oldest country on the planet, what might also be at risk are papa's pensions, and much, much more.

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