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Euro Upstages Recovery for Italian Velvet Curtain Maker

Italy's Prime Minister Matteo Renzi
While the strong euro has hurt exports from all 18 nations in the currency bloc, it has been especially acute in Italy, where Premier Matteo Renzi has been counting on external demand to pull the economy out of a slump that has lasted more than two years. Photographer: Alberto Pizzoli/AFP via Getty Images

From Teatro Colon in Buenos Aires to New York’s Metropolitan Opera, Luca Ferrari says his red stage curtains hang in venues worldwide. With costs and prices in euros, the strength of the currency is hampering sales.

“A better exchange rate would allow us to increase sales by 20 to 30 percent,” said Ferrari, chief executive officer of Manifattura Tessile di Nole SpA, located in Italy’s mountainous northwestern Piedmont region.

The euro touched a 2 1/2-year high of almost $1.40 in May. Although weakening the past two months after the European Central Bank cut interest rates and started charging for some deposits, it’s up about 10 percent since President Mario Draghi pledged in July 2012 to defend the currency come what may.

That strength has been felt particularly in Italy, where Prime Minister Matteo Renzi has been counting on external demand to pull the economy out of a slump that has lasted more than two years. For the Italian companies that rely on selling their products abroad, it’s been a drag on sales that are key to the euro region’s second-biggest manufacturer. Exports outside Europe declined 2.2 percent in the first six months of 2014 compared with the same period last year.

$40 Billion

The euro traded at $1.3348 at 2:22 p.m. in London today, while yields on 10-year Italian bonds were 2.79 percent, down from 4.13 percent at the start of the year as Draghi’s backstop lured investors.

Italian exports might rise by 30 billion euros ($40 billion) if the exchange rate dropped to $1.25, according to Riccardo Monti, head of the Italian Trade Agency, or ICE.

“We expect the initiatives by the ECB to strengthen the dollar further and to allow for a less penalizing exchange rate,” he told reporters in Rome on July 30.

Italy’s gross domestic product contracted 0.2 percent in the second quarter, after a decline of 0.1 percent in the first three months of the year, Rome-based national statistics office Istat said today. The median prediction of economists in a Bloomberg survey was for a 0.1 percent expansion. Istat reported that the contribution from net exports was negative, while that of domestic demand including inventories was neutral. The breakdown will be published Aug. 29 with the final figures.

Deficit Increase

Last month, the Italian central bank lowered its 2014 growth forecast for Italy to 0.2 percent, less than a third of its previous prediction. The International Monetary Fund expects Italy’s GDP to expand 0.3 percent this year compared with 1.2 percent in Spain and 3.2 percent in the U.K.

Lower-than-expected growth may undermine Prime Minister Renzi’s plans to cut spending and keep the budget deficit within the euro region’s limit of 3 percent of GDP and to start reducing Europe’s second biggest debt burden.

“Renzi could deliberately choose not to make any adjustment and increase the deficit,” Francesco Galietti, founder of research firm Policy Sonar in Rome, said on July 31. “A prime minister who does not do his homework and violates European laws would certainly not be welcomed” and markets would see this as an act of hubris, he said.

Recent data don’t bode well.

Youth unemployment rose in June to the highest since records started in 1977. Italian manufacturing grew at the slowest pace in eight months in July, evidence that the euro region’s third-biggest economy is struggling to build momentum.

Lower Profit

“The strongest variables at the moment are low demand and supply constraints due to tight credit and low profits of Italian companies,” Raffaella Tenconi, an economist at Bank of America Merrill Lynch, said by e-mail.

Italy’s biggest private broadcaster, Mediaset SpA, posted a loss in the second quarter because of a slump in advertising sales, while utility Enel SpA reported a 4.8 percent drop in adjusted net income due to weak electricity demand in Italy and Spain and unfavorable exchange rates.

In Piedmont, fabric maker Ferrari is hoping he can weather the currency effects on his business and sell more of his lush velvets, which are also used for curtains and seats at the Paris Opera and Kuala Lumpur’s Petronas Philharmonic Hall.

“It forces us not just to be competitive, but to be the best of the best,” he said in an interview at an event in Rome. “To win the World Cup every single year.”

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