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Last Updated: Thursday, 13 April 2006, 16:36 GMT 17:36 UK
Italy looks for brave new future
By Ben Richardson
BBC News business reporter

Reforming Italy's economy is not only a thankless task, it can get you killed.

Marco Biagi, left, and Romano Prodi
Mr Biagi, left, was an old colleague of Italy's Romano Prodi

If anyone doubts the difficulties the country's government will face trying to boost growth, they need only look at what happened to Professor Marco Biagi.

An expert on labour law and industrial relations, Mr Biagi was assassinated on 19 March, 2002, in Bologna by the left-wing terror group the Red Brigade.

His crime had been to help draft, and advocate, changes to Italy's rigid and slow-moving labour market.

"There is a hard reality in this country that people try to gloss over," says Franco Pavoncello, president of John Cabot University in Rome. "Politics can get really nasty."

Ghost majority

No one is predicting that bloodshed will follow Italy's acrimonious general elections, but the country needs far-reaching reforms that will touch on emotive issues such as jobs, pensions and the privatisation of state firms.

It is not alone in having to face up to significant problems, and the strength of public feeling it will have to deal with erupted in France last month.

Having tabled plans to make it easier for firms to hire and fire young workers, the French government was forced into an embarrassing climb-down after the changes to the labour laws sparked widespread public protests and riots.

To change Italy will take courage and a strong government
Franco Pavoncello, president of John Cabot University in Rome

If such significant changes are difficult for a relatively strong government, then they are likely to prove almost impossible with the whisker-thin majority that Romano Prodi's left-wing alliance seems to have won in Italy, analysts said.

According to the final election figures - which the Prime Minister Silvio Berlusconi has contested - Mr Prodi's L'Ulivo coalition gained 158 seats in Italy's Senate (the upper parliamentary house), compared to the his rivals' 156.

At the same time, L'Ulivo is thought to have won the vote in the Chamber of Deputies (the lower house) by a mere 25,000 votes.

"To all intents and purposes, the majority does not exist," said business daily Il Sole 24 Ore.

Balancing act

The frustrating thing for voters and analysts is that almost all of them agree on what Italy needs to do to ignite economic growth that dwindled to nothing last year.

For their part, Mr Prodi and his allies have promised to get Italy moving, and to cut public debt levels that are amongst the highest in Europe.

Firstly, they plan to cut payroll taxes by five percentage points, saving companies about 10bn euros (7bn; $12bn) a year in costs, and in theory improving the efficiency of the workforce and making firms more willing to hire new staff.

Italians at a labour rally
Italy's workers are facing threats from lower-cost foreign rivals

They also want to stoke up consumer spending by lifting the take-home pay of workers, and have vowed to open up professions such as architects and notaries, that are currently controlled by powerful industry bodies that limit numbers.

However, at the behest of the Communist parties that make up a key part of Mr Prodi's alliance, they may try to repeal the "Biagi" law that helped employers use more short-term working contracts and improved labour market flexibility.

The far-left factions of the alliance are also set to complicate any plans to privatize state industries and drive consolidation in areas such as banking.

Going grey

On pensions, one of the few areas that Mr Berlusconi was credited with making some improvements, Mr Prodi's alliance would abolish a law that had raised the retirement age to 60 from 57.

Instead it would look for incentives for companies to keep employees working longer - a key factor in a nation where the birth rate is declining and the number of elderly is increasing.

Italy's government also is saddled with a mountain of public debt, that has ballooned to 106.5% of gross domestic product (GDP), and a budget deficit that has bust through European Union limits for the past two years.

Italy's Romano Prodi
For many Italians, the future offered by Mr Prodi is pretty bleak

Mr Prodi has promised a review of government finance, better tax collection, the re-introduction of inheritance tax on the country's wealthiest people, and a pledge not to follow through on expensive projects like a bridge to link mainland Italy and Sicily.

"The priority of the Italian government right now cannot fail to be the economy, a fresh boost to development, the fight against debt and the deficit," Il Sole 24 Ore says.

"Everybody is wondering whether this agenda can be respected."

New blood

One proposal to boost stability that has been put forward by Mr Berlusconi is the idea of a grand coalition of left and right, similar in construction to the German government that is being held together by Chancellor Angela Merkel.

This idea is nothing new, and was even being mooted by both sides ahead of the elections in Italy.

Mr Prodi has dismissed the move and analysts reckon that any cooperation would be a miracle because of the divisive nature of the election campaign and the long political history that trails the leaders and many of their key lieutenants.

"To change Italy will take courage and a strong government," says Mr Pavoncello, adding that if Italy is to carve itself a bright new future, then voters need to be offered a new and vibrant political class.

The question facing Italy is whether there is anyone brave enough to take up the challenge.

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