The Fiat Group used to enjoy a strong presence in Europe, and especially in its home market of Italy, where it has traditionally been very strong. But that’s not the case anymore. The debt crisis that is threatening Europe and especially the northern countries has decreased demand significantly, with the Italian car market hitting its lowest point in the last 15 years.

Analysts estimate that Fiat, which in 2011 recorded its worst sales performance in 20 years and is losing nearly 1 billion euros annually, may do the unthinkable: either stop or significantly reduce its 100-year old local operations.

“Economically, financially, Fiat is already out of Italy”, an investment banker who follows the company told Reuters, with a Milan broker adding that: “Our perception is that a significant downsizing of the business in Italy is a distinct possibility.”

CEO Sergio Marchionne said last Friday that he expected 2012 to be another difficult year for the Italian automotive market, in contrast to the U.S. and Chrysler, for which he is optimistic.

Marchionne cites low productivity, high labor costs and rigid work contracts for the group’s losses in its home market, and has been battling the unions and the rest of the country’s industry over these issues. As a result, Marchionne announced that from January 1, Fiat will no longer be a member of Confidustria, the Italian industry association.

Currently, Fiat has five loss-making factories in Italy that employ 22,000 workers who manufacture 650,000 cars a year. The comparison with Fiat’s plant in Tichy, Poland, where 6,000 employees produce 600,000 units annually, does not look too favorable for the Italians though we must note that Fiat’s Italian plants build more complicated models than their Polish counterparts.

Unfortunately, things are getting worse by the day. FIOM, Italy’s biggest metalworkers union, is threatening a general strike, accusing Marchionne of taking back his original promise of investing € 20 billion ($26.8 billion US) in Italy until 2014.

The 2009 tie-up with Chrysler is what keeps the company afloat now. In the third quarter of 2011, two-thirds of the Fiat-Chrysler group’s profits, which are expected to exceed €2.1 billion ($ 2.8 billion US), came from Chrysler.

Moreover, before the Chrysler tie-up, Italy accounted for nearly 30% of the groups combined revenue; today, that number has dropped to less than 15 percent.

At the time, it seemed like the Italian knight in shining armor had come to rescue the American damsel in distress. Less than two years later, the reinvigorated Chrysler is the one helping Fiat out. Funny how things turn out…

Story References: Reuters