More than a century later, Tuscany and the neighbouring regions of the north remain the centre of economic power in Italy and are the political stronghold of Prime Minister Silvio Berlusconi. But his centre-right coalition government presides over a country in which deep regional, cultural and political rifts persist.

Those divisions have, if anything, deepened since Berlusconi took office two years ago. The media mogul's second term has not been an easy one. The meeting of the G8 countries in Genoa was marred by riots; then came the economic downturn that followed the 11 September attacks on the US. This year, Berlusconi's equivocal support for a US invasion alienated not only the Catholic church, but also the centre-left opposition and the anti-war majority.

Briefly taking centre stage in Italian foreign politics, the affairs of the Middle East have long played an important role on the domestic scene. Once the principal European gateway for medieval Arabic research in the arts and sciences - which in turn helped spark a northern renaissance - Italy has since become a crossing point for a less welcome influx of economic migrants. There are now an estimated 1.6 million illegal immigrants in the country, the majority from the Middle East, North Africa and the Balkans.

The government's immigration policy remains a key area of controversy. The PM's election manifesto in 2001 called for the refusal of entry to any immigrant without a work permit. Another proposal was to allow the coastguard to fire on smugglers transporting illegal immigrants into Italy. Not surprisingly, these strong-arm tactics met with little support from left-leaning politicians inside and outside Berlusconi's government.

The business exploits of the richest man in Italy have also helped to smear further a less-than-spotless political reputation. The apparent conflicts of interest between affairs of state and Berlusconi's business empire - which includes Italy's three largest private television channels - have yet to be resolved by a long-promised law that would regulate the relationship between politics and big business. This uneasy situation has been compounded by a string of corruption cases in the law courts, several of which have implicated Berlusconi himself.

Although an earlier case against him was quashed, Berlusconi still faces charges of bribery in a case dating back to the mid-1980s. Matters have not been improved by the recent conviction of one of his closest friends and political associates, Cesare Previti, who was sentenced in early May to 11 years' imprisonment for corruption. The Prime Minister stood by Previti throughout the trial, airing allegations of a left-wing conspiracy designed to bring down himself and his closest allies. Following the conviction, Berlusconi denounced what he called 'the persecution of Previti', saying 'the politicisation of a part of the judiciary is a problem which must be solved for the good of the country, its institutions [and] the Italian citizens'. For its part, the council of the judiciary replied that his statement had insulted the 'honour and impartiality' of the judges concerned. The battle between the executive and the judiciary is likely to rumble on for some time.

Behind these political spats, the Italian economy continues to founder, with the Bank of Italy (central bank) predicting meagre growth of 1.3 per cent this year. The budget deficit, which reached 2.3 per cent of gross domestic product (GDP) in 2002, is expected to widen further. Few efforts have been made to tackle the country's ramshackle infrastructure and the government continues to encounter considerable union resistance to reform of its stringent labour laws, which are blamed for the low proportion of working-age people - only 54 per cent - in full employment.

These problems come at a time when a divided Italy prepares to assume the presidency of an equally divided European Union. The causes of these divisions are much the same at local and regional levels. In particular, the war in Iraq and relations with the US have split the EU down the middle. Other issues - such as immigration and labour controls - have moved up the agenda due to the entry of 10 new members into the EU next year.

The key supporters of European integration, France and Germany, are concerned by Italy's increasingly sceptical stance. EU leaders reacted angrily to Berlusconi's recent attempts to head off an EU-imposed fine after Italy exceeded its annual milk production quota. The Italian appeal, which held up proceedings at an EU summit on 21 March and delayed an agreement over a cross-border savings-tax deal, was 'a sign of a new European policy aimed at protecting our national interests,' according to Finance Minister Giulio Tremonti.

The dispute does not bode well for a smooth presidential succession on 1 July. Nor does the unprecedented attack on Berlusconi by EU Commission President Romano Prodi in mid-May. 'I am seriously outraged by how the head of the government has used public television for his own personal goals in a way which has no precedents in our history,' Prodi said shortly after Berlusconi appeared in a long interview on Italian Rai TV. 'Italians should reflect with serenity.'

A former Italian PM himself, Prodi has so far steered clear of commenting on domestic politics since he took over his EU position in 1999. The remarks may only signal a return to the Italian political scene, but they do not augur well for serenity in the upper ranks of the EU hierarchy. The concern in the months to come will be that hitherto inconspicuous Italian political rivalries could be transferred to the limelight of the European stage.

While the EU agenda is dominated by the accession of 10 Central and Eastern European members next year, Brussels continues to work on the gradual economic integration of the Euro-Med partners to the south. Italy has a particularly important role to play in this process, given its strong trade links with the Middle East and North Africa. In 2002, Italy exported goods and services worth Eur 13,370 million to the region. This figure accounts for 5 per cent of all Italian exports, making it the second largest European exporter to the region. Bar the occasional major engineering, procurement and construction (EPC) contract, the bulk of exports comprise smaller transactions between small and medium-sized companies.

The government's vocal support for the war in Iraq may win it more business in the future, as Washington rewards its supporters with roles in the reconstruction process.

Rome has already expressed an interest in becoming involved in the 'stabilisation force' being assembled by the US. But there is a worry that the divisions opening up in the EU could make themselves felt within any multi-national force in Iraq. As Foreign Minister Franco Frattini commented at a recent EU defence summit: 'If the embryo of an increased military co-operation were to develop in Brussels, I would regard it with a very critical eye.' It is a look that many of Italy's neighbours may be willing to return.

Exchange rate: $1=Eur 0.87

Digby Lidstone