| PORCIA, Italy, March 9
PORCIA, Italy, March 9 The boxy white and grey
factory of this rainy northern town makes fewer than half the
washing machines it did when Italy joined the euro. It is one of
the many symbols of Southern Europe's industrial decline.
Today, however, the Porcia plant is also a testing ground
for the region's industrial future.
Home appliance maker Electrolux, which owns the factory,
wants to cut the salaries of some 5,000 workers at the plant and
three other factories across Italy by up to 15 percent over the
next three years. The Swedish company says lowering labour costs
is the only way its washing machines, fridges and other home
appliances can compete against rival products made in eastern
Europe and Asia.
The Italian government, unions and workers say any wage cut
would impoverish thousands of families who rely on the plant and
"It's a matter of survival," says Annarita Licci, a
38-year-old mother of two, who moved to Porcia in 2000, the year
after Europe introduced its single currency.
Then, Italy was the leading world exporter of home
appliances. Now it is ranked third, far behind China, which has
grabbed more than one-third of the 100 billion euro ($140
billion) global market. Like many others, the Porcia plant has
Last year Licci's partner took a company buyout. If
Electrolux cuts her 1,000-euro salary by 130 euros - in line
with the ballpark reduction estimated by the company - Licci
says she will no longer be able to afford monthly expenses,
which include a 600-euro mortgage.
"The company wants to lower its labour costs and starve us,"
she says. "What about investing in developing better products
for this factory instead?"
The battle over Electrolux wages is at the heart of one of
the most pressing dilemmas facing the battered economies of
Italy and other southern European countries: The competing needs
to both cut costs, and spark growth.
Companies across Europe's southern rim struggle because
wages and prices have risen higher than their products can
justify. But euro zone countries can no longer depreciate their
currencies to make their products cheaper in foreign markets.
That leaves so-called "internal devaluation" - pushing down
wages and prices - as the best way to stay competitive.
Spain, Greece and Portugal have pushed through deep wage
cuts and made it easier to hire and fire, allowing firms to trim
the price of their goods. This has helped Spain's economy grow
for the first time since 2011. Italy, where labour costs are
still high, is flatlining.
But there are risks. A squeeze on pay could choke off
already feeble consumer spending because workers have less money
to spend. And as producers lower prices, it risks triggering
what economists call a "deflationary spiral" in which consumers
no longer buy goods, in the expectation that prices will
continue to fall - a belief that creates an ever deeper
The most dramatic recent example is the two-decade great
deflation from which Japan is only just emerging. In Spain,
there is growing concern that the effects of wage cuts on the
country's feeble internal consumption could cripple long-term
Inflation helps countries lower their debt by increasing the
money at their disposal to pay it off. Deflation, on the other
hand, makes reducing debt harder because money is more
expensive. It also puts companies off borrowing and investing.
That's a problem in Italy, which has 2 trillion euros in debt -
the second-highest in the euro zone after Greece, as a share of
Gross Domestic Product.
"Pushing down wages is dangerous: The most worrisome
consequence would be depressing consumption where there is
already a demand crisis," said Carlo Devillanova, economics
professor at Milan's Bocconi University.
In many ways the factory in Porcia mirrors Italy's economic
rise and decline.
It was built in the 1950s, just as the economic miracle that
lifted Italy from the rubble of World War Two got started. Lino
Zanussi, whose blacksmith father Antonio had started out making
stoves and ovens in a workshop in Pordenone in 1916, used the
plant to help transform Zanussi into a top European home
Along with Germany, Italy became the world's leading
exporter of home appliances. Porcia was a vibrant artery of
Italy's industrial heartland. Locals in the Pordenone province
called the area the "Manchester of Italy" for its huge output.
By the 1980s, though, Zanussi had run into financial
troubles and in 1984 the family sold to Electrolux.
The Swedish firm kept a big presence in Italy until the
mid-2000s when competition prompted it to move a chunk of its
production to low-wage eastern Europe. Over the past 14 years,
Electrolux has shed 71 percent of its workers in western Europe
and 60 percent in the United States. At the same time, the
company's staff in eastern Europe has risen by one-third to
Luigi Bidoia, economist and co-founder of research firm
StudiaBo, says that after the mid-2000s it made little sense to
keep producing in Italy. "Other countries now offer the same
skills and pay at a half, a quarter, a tenth in wages," said
HIGH END OR NOTHING?
Cutting wages is not the only way for Italy to compete. The
southern economies would all benefit if Germany, the euro zone's
strongest economy, boosted its internal consumption and
encouraged more imports from its neighbours. The European
Central Bank could also do more to try to stimulate southern
European economies, allowing inflation to rise from its current
So far, though, there are no signs of either happening. ECB
President Mario Draghi has welcomed "relative price adjustment"
- wage cuts - in Spain, Portugal and Greece.
Such an adjustment has not happened in Italy. According to
the European statistics agency Eurostat, unit labour costs rose
4.2 percent between 2000 and 2012 in Italy, against a fall of
2.8 percent in the European Union.
Part of the reason is that Italy's labour laws make it
difficult for companies to adjust pay and hours to fluctuations
in the economy. The cost of employing workers is also pushed up
by the high labour taxes and social contributions employers must
pay. According to the OECD, those make up just under half the
cost of employing a worker in Italy. In other developed
countries they total 35.6 percent, on average.
At the end of February when he first took office, Italy's
Prime Minister Matteo Renzi promised to reduce the burden on
companies, citing the Electrolux standoff as a key issue for his
new government. Fiat CEO Sergio Marchionne has criticised
Italy's rigid labour market rules and in 2011 reached a deal
with workers at the car marker's main factories, introducing
more flexible conditions in exchange for investments.
The other way to compete is to produce high-value products
that warrant higher prices, innovating to create products that
people crave. Italy already successfully makes high-end goods
from luxury clothes to food and small electronics.
But as spending on research and development has shrivelled -
Italy's is among the lowest in the developing world - the
country has steadily lost out in other areas, including home
appliances. In a speech last year, Bank of Italy governor
Ignazio Visco singled out the sector as emblematic of the
country's industrial decline. One example: Italy made two
million refrigerators last year and 10 million in 2001.
"A country like ours has to position itself as a maker of
high-end products through innovation and research," said Claudio
De Vincenti, a top official in Italy's economic development
ministry recently appointed by Renzi.
That may have been a factor in Electrolux's struggles,
according to one former employee. As it moved production east,
Electrolux also shifted its commercial strategy. In particular,
it bundled together well-known home appliance brands such as Rex
in Italy and Germany's Juno with its generic, namesake
Electrolux brand. The Zanussi brand survived, but production was
partly moved outside Italy.
Mario Grillo, a former Electrolux manager who used to run
its refrigerator plant in the north-eastern town of Susegana,
says the change in strategy was a mistake, because brand loyalty
is a key factor among home appliance customers. Grillo blames
that decision and a dearth of investment in new products for
Electrolux's loss of market share in Italy to U.S. firm
Whirlpool, Germany's Bosch and South Korea's Samsung.
"If you don't invest enough in innovation, you get left
behind," says Grillo.
Electrolux said in a statement that it has invested
considerably in Italy, including more than 245 million euros
between 2009 and 2013. In the statement, the company said more
than 800 of Electrolux's 6,000 staff in Italy are engineers and
technicians working on research and development, and the firm
produces most of its highest-end washing machines, refrigerators
and stoves in Italy. But an Electrolux spokeswoman declined to
say how much the company invested in Italy before 2009.
Ernesto Ferrario, the firm's chief executive for Italy, last
month put together a proposal with union leaders aimed at
securing the plant's future. Under the proposed deal, Electrolux
would not touch wages but would reduce the plant's workforce by
at most 400 people over three years. It would also guarantee
some investment in exchange for a government commitment to cut
some labour taxes. Officials from Renzi's government met
Electrolux management last week, but no decision was taken.
In Porcia, people are bracing for the worst.
Claudio Pedrotti, a former Electrolux manager who is now the
mayor of Pordenone, says that if a deal isn't found and the
plant closes, there will be a "tidal wave" of job losses.
On a recent Friday afternoon, Licci, the Electrolux factory
worker, joined a union-led protest outside the factory. A petite
blonde with thick eye makeup and a cigarette in hand, Licci said
employment at the factory had helped her get a mortgage and buy
Up until 2008, Licci took home 1,400 euros a month. But
Electrolux gradually reduced her hours so her wage has fallen to
1,000 euros. On top of her 600-euro mortgage she pays 310 euros
a month for school lunches, electricity and gas, and fuel for
her commute to work. "We made sacrifices thinking we had a safe
future ahead, but now everything seems to be at risk," said
Paolo Candotti, head of human resources at Porcia until 2003
and now the general manager of local business lobby Unindustria,
put it more starkly: "Someone should explain to workers that
without a cut in wages, a 1,200 euros salary risks soon becoming