BOLOGNA, Italy (Reuters) - It's not long into a chat with an Italian businessmen before talk turns to how a costly state is sucking the air out of Europe's third-largest economy, endangering the euro along the way.
"In the end we're asking for only one thing: a normal government for a normal country," said Maurizio Marchesini, the president of Confindustria, Italy's main employers' association, in the wealthy north-central region of Emilia-Romagna.
Emilia-Romagna, of which Bologna is the capital, is doing better than much of Italy. It is one of the top 10 industrial regions of Europe, home to companies such as Ferrari and pasta giant Barilla, and seems to be largely free of organized crime.
Clusters of mainly medium-sized firms in engineering, packaging, food processing and ceramics are a reminder that, despite a government debt burden hovering at 120 percent of annual output, Italy is Europe's second-largest manufacturer.
Yet all is not well. Italy is in recession and few expect growth to resume before 2014. Exporters are coping, sometimes flourishing, but many firms that depend on the domestic market are floundering, even in defensive sectors such as food, said Giampiero Bergami, a banker for Unicredit.
Sales and profitability are under assault. "Gloomy would be putting it mildly. We are witnessing a constant contraction of both top lines and margins," Bergami said.
HIGH COSTS
Household consumption is at a post-war low, depressed by tax rises and spending cuts that Prime Minister Mario Monti, a technocrat, has forced through to rein in Rome's budget deficit.
Entrepreneurs respect Monti, who has said he would be willing to stay on if elections next spring produced a deadlock. But if businessmen are doing well, they say this is in spite of the state, not thanks to it.
Marchesini, who runs a successful packaging firm, lists his complaints. The inflexible labor market is "quite impossible for a foreigner to understand"; red tape is so bad it takes at least a year to open a factory; and then there are punishing taxes, poor infrastructure and the high cost of credit.
Companies have long said they are reluctant to recruit staff even in good times because labor laws make it hard to shed workers if their business turns down.
Confindustria estimates the political malaise is responsible for 2 percentage points of the risk premium of more than 3.2 points over German debt that investors demand to hold 10-year Italian bonds, which now yield about 4.8 percent.
Because government bond yields set the benchmark for corporate borrowing costs, Marchesini is paying interest of 4-5 percent despite rising turnover and a good credit rating. That puts him at a big disadvantage to his German competitors.
"So you can imagine it's hard to make big investments. Of course I haven't stopped investing in development and new machinery. But, for example, to buy a new building is a real problem," he said. "It's very difficult to obtain a mortgage."
Government borrowing costs have also become an indicator of the wider euro zone crisis. At the moment, attention is focused on Spain and Greece, but if Italy does not show soon that it is getting to grips with its problems, the country could be next in line to shake the 17-nation currency union.
ASIA VERSUS ITALY
For Eraldo Poletto, the outgoing managing director of Furla, a family-owned maker of luxury leather goods based in Bologna, ever-changing laws, bureaucracy and high taxes are undermining what he says is an old entrepreneurial spirit in Italy.
Speaking during a business trip to India, Poletto contrasted what he called Asia's amazing desire to succeed to Italy's constant concern to preserve past gains. "Here they want to win; we in Italy are afraid to lose the privileges we have. We need a wake-up call," he said from Mumbai.
Domestic carmaker Fiat has frozen a multi-billion-euro investment plan in Italy because of poor market conditions and competition from low-cost production outside Europe, while Alcoa Inc is shutting its Italian aluminum smelter in Sardinia largely due to high energy costs.
Energy is also one of the problems facing the ceramic tiles sector, which has struggled to recover from a slump in 2008. It costs 50 percent more than the European average, especially for industrial users, because of limited competition, according to the International Monetary Fund.
"We're at one of the lowest points in our history," said Franco Manfredini, head of the ceramics employers' association in the town of Sassuolo, where 80 percent of Italy's tiles are produced. "We have to become a serious country."
To make up for a slide in domestic sales, which were down 16 percent in the first half of the year, local tile makers are opening factories abroad, emphasizing innovation and exporting more. Tiles from Sassuolo, an hour's drive from Bologna, clad Brisbane airport and Riyadh's biggest shopping mall.
BAD REPUTATION
Mauro Sacchetto, the chief executive of Datalogic, a leading producer of bar code readers, says a succession of governments has neglected the sort of cooperation in research between industry and universities that his company enjoys in Vietnam, where it opened a plant in 2009 that now employs 600.
"Italy's reputation is due to a lack of credible, reliable politicians. We have enough of an industrial culture to prove that we are much better than our political and banking reputation," Sacchetto said.
Bologna-based Datalogic has three research centers but just two small factories in Italy, which account for only 9 percent of the fast-growing firm's global sales.
Italy's economy has barely expanded in a decade, and Morgan Stanley reckons its potential growth - the rate at which output can rise consistently without generating inflation - may be now just 0.5 percent a year. Only Greece, the bank noted in a report, scores worse among mature economies on a range of World Bank indicators assessing the ease of doing business.
NO LAZY EXCUSE
Blaming politics sounds like a lazy excuse for this abysmal performance, but Stefano Zamagni, an economics professor at the University of Bologna, said the political system truly was at the heart of Italy's economic problems.
After a decade of carefree government spending in the 1980s, Italy needed restraint and reform. Instead, a crumbling of the post-war political order in 1992 led to the emergence of parties based on individuals, notably three-times prime minister Silvio Berlusconi, rather than by ideology.
Since then, Zamagni said, Italy had suffered increasing rent-seeking - the term for how groups or individuals use their clout for economic gain without benefiting society.
About 1.5 million civil servants, put on the payroll by vote-seeking politicians, extract a bureaucratic rent because they are literally unproductive. Other examples include financial speculation, tax evasion and corruption, he said.
Zamagni estimates total rents at a third of annual output, eating into wages and profits, and sapping the economy. "When rents are high, salaries are lower than they should be; hence effective demand is lower. And unless you increase the profit share, then of course companies will not invest," he said.
MIXED MESSAGES
But Zamagni believed Italians were getting fed up. He said he sensed Italy was approaching the "bottom of the curve" as voters realized they shared the blame for Italy's woes.
The country had also demonstrated its ability in the past to pick itself up, notably after World War Two. "Italians show the best of their nature when they're under stress," he said. "That is why I am moderately optimistic about the near future."
At Furla, Poletto questioned whether Italy was ready for the "cultural revolution" he said was needed. Voters, including entrepreneurs, had only themselves to blame for electing politicians like Berlusconi whom they now scorn.
"They are there because we vote for them. And then we complain about it? Shame on us!" he said.
Emilio Mussini, chairman of Panariagroup, a big ceramics manufacturer based in Sassuolo employing 1,700, said he also sensed change was in the air; Italians were realizing that the country had been living beyond its means.
"If you speak to people in the street or in the caf?, there is a new awareness," he said. "We're becoming conscious for the first time that we need to change our model."
At Confindustria, Marchesini begged to differ, saying businessmen had no clear view of what lay ahead.
Asked whether he was confident the political environment in the coming decade would be better for the economy, Marchesini replied without hesitation: "We need to have good government within the next five years, not in 10 - that would be too late for our economy."
(editing by David Stamp)
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