ITALY celebrates 50 years as a republic this year amid hopes that the new government formed in May will last longer than its 54 predecessors. From the ruins of the Second World War, Italy has emerged as a leading industrialised country and core member of the EU. Yet, despite the dynamism of its leading corporations and multitude of small and medium-scale businesses, Italy has never managed to belie its reputation for venal politics.

This has come to a climax in the 1990s, with the disgrace of the political elite as former prime ministers have gone on trial for murder or fled into exile to escape prosecution. However, the new government is of a different stamp and it has raised hopes that endless talk of reforming the republic will actually be translated into reality.

The victory of the so-called Olive Tree alliance in the April elections was a narrow one, but the coalition is expected to survive for some time as it has a majority in both houses of parliament. Its advent also marks the first time that the left has become the main partner in government since 1946.

Led by a trio of experienced technocratsturned-politicians, the alliance campaigned on a pro-European agenda of pragmatic reform and fiscal prudence and hopes to reverse Italy's record of runaway deficits, rising national debt and financial instability. It also promises to reform the state by devolving more power to the regions.

By any account the new eight-party alliance of the centre-left is an odd one. It combines central bankers and former communists, environmentalists and Marxists - all more united by a common interest in power than any shared ideology. Despite its disparate elements, the coalition has managed to find favour with the financial community and bond, equity and currency markets have all rebounded strongly since its victory. This says much for the faith that is pinned in the calibre of the new cabinet team.

Seen as technicians rather than seasoned politicians, the four leading figures in the government have emerged unscathed from the long-running anti-corruption campaign which has destroyed the careers of hundreds of establishment figures during the last five years. All are seen as reformers.

Prime Minister Romano Prodi is a former economics professor who has moved from academia into politics via the huge state holding company IRI, which he is credited with revitalising. The outgoing prime minister Lamberto Dini has taken the foreign affairs portfolio and another ex-prime minister and former central bank governor, Carlo Azeglio Ciampi, has responsibility for the treasury and budget.

An intriguing appointment was the selection of the former Milan prosecutor Antonio di Pietro as minister of public works. Di Pietro, who is not a member of parliament, became a national hero for his fearless pursuit of public figures during the anti-corruption campaign.

This had infuriated some prominent people in business and public life who felt they were being victimised.

Indeed, the powers of the judiciary were made into an election issue by the right-wing Freedom Alliance of Silvio Berlusconi, who was determined to trim the wings of the inquisitive judges and is himself embroiled in a corruption case. Di Pietro's job now is to revive the public works ministry, which has been paralysed by the corruption enquiries.

Having savoured power as prime minister for seven months in 1994, election defeat was a bitter blow to the ambitions of media mogul Berlusconi who faces an early eclipse as the undisputed leader of the right. His Forza Italia movement is the second largest party in parliament, but its promise of instant tax cuts and restraint of the judges only won it 20 per cent of the vote.

Berlusconi himself may decide to step aside if the new parliament decides that a conflict of interest exists between his television holdings and his political activities. His ally Gianfranco Fini of the far right National Alliance fared worse and took only 15 per cent of the vote.

The secessionist Northern League, which worked with the two right wing parties in the Berlusconi government in 1994. fought the election alone and boosted its share of the vote to 11 per cent. In a calculated snub to the republic, the Northern League swore in its own self-styled government on 1 June as President Scalfaro led 50th anniversary celebrations in Rome.

The so-called Padanian parliament may be dismissed as a theatrical gesture, but as a protest it sums up the scorn that many northerners feel for the state. The main reason for their mistrust is money. The overall burden of taxation in Italy is among the highest in Europe and many voters, particularly in the richer northern regions, feel that their payments to the state are squandered by spendthrift and corrupt politicians.

Improving public finances is Prodi's main priority. He has pledged to tackle inflation and cut the budget deficit to enable Italy to rejoin the Exchange Rate Mechanism (ERM) in time for European Monetary Union (EMU) in 1999. To be eligible for full participation in EMU Italy must return to the ERM next year at the latest. This may be a tall order as the record on inflation, interest rates, public deficits and public debt fail to meet minimum ERM criteria.

Inflation was running at an annualised rate of just under 4 per cent in June. down from an average of 5.4 per cent in 1995. But interest rates are among the highest in Europe - at 5.25 per cent above comparable rates in Germany - and the government is keen to reduce them to cut its own debt servicing costs. High interest rates are also putting a brake on business and the government expects the economy to grow by only 1.3 per cent this year. The employers organisation Confindustria is forecasting that the economy will grow by only 0.7-0.8 per cent.

Prodi hopes that the broad welcome for the new administration from the financial community means that interest rates will drop by two or three points in the coming months. Yet, slower growth and over-optimistic revenue targets are playing havoc with efforts to reduce the budget deficit and the government has had to propose spending cuts of IL 11 trillion ($7,140 million) to keep the 1996 deficit target in sight, at 5.9 per cent of gross domestic product (GDP). Savings are to be made by reducing transfers for the railways, roads, defence and the export credit agency SACE.

The process of trimming spending could provide the first test of the credibility of the coalition, which relies for its parliamentary majority on Reconstructed Communism (RC). This faction, constituted from the hard core of the former communist party, has pledged to support the government, but refused to endorse the programme that Prodi outlined to parliament on 22 May.

EU orientation

The government has already expressed enthusiasm for the process of European integration and crowned its six-month presidency of the EU at the Florence summit on 22-23 June. Officials stress that the country is determined to pull its weight in the union and, anticipating a period of relatively stable government, are hoping to see some new initiatives launched.

'We believe that this government will last some time,' says an official in Rome. 'When your life expectancy is six months, you can't really make serious plans - if you can expect two or three years, you can plan.' The fact that foreign minister Dini served as prime minister before moving aside in favour of Prodi should bring further energy to foreign policy. 'Now the former prime minister is the foreign minister, we hope he will give an extra push to restoring activity,' says the official.

Italy's approach to international affairs is strongly influenced by its EU membership and it favours collective action over independent responses to major issues. Although it has strong bilateral links with the Arab states of North Africa and the Middle East, Rome is a keen supporter of multilateral initiatives to address the region's problems, from the peace process to the promotion of prosperity.

One reason for favouring a strong European approach is Italy's frequent discomfort with the aggressive US attitude towards some of the states of the region. In the case of Libya, Iran and Iraq, leading figures in Italy's business establishment are often angered by US attempts to isolate and punish these countries. They favour dialogue over forced isolation and are vehemently opposed to the latest efforts of the US Congress to tighten sanctions further on Iran and Libya.

For Italy, in particular, normal relations with these two oil producing countries are essential as Iran and Libya between them supplied 46 per cent of Italy's crude oil imports in 1995. Any tightening of sanctions could start to directly affect their ability to extract and export crude oil.

The years of violence in Algeria have caused similar anxieties for Italy which has an umbilical link to the country through the Trans-Mediterranean gas pipeline. Italy imports more than 17 billion cubic metres a year via Sicily and will be the largest buyer of new gas supplies that Algerian state energy company Sonatrach is making available.

Hence its interest in seeing an Algerian political settlement and in ensuring the stability of North Africa. 'Geopolitically, these countries are extremely important as we depend on them for energy. Politically, it has always been an absolute priority to have stability,' says a diplomat in Rome.

The framework for managing relations with the region is threefold: the so-called Barcelona process which combines the 15 members of the EU and 12 Mediterranean countries; the multilateral track of the Middle East peace process; and the Mediterranean forum which brings together Spain, Italy, Portugal, Greece, France and Turkey with Algeria, Morocco, Tunisia, Egypt and Malta.

The Barcelona process is intended to generate a 'co-prosperity' zone in the Mediterranean in the belief that economic progress is the best guarantee of political stability. Last November, the EU pledged ECU 4,865 million ($6,094 million) over a 5-year period to promote economic development in the region and ease its integration into the world economy. Italy has also taken a 5 per cent stake in the Middle East Development Bank. to be established in Cairo, which is a result of the multilateral track of the peace process.

The fear remains that failure to improve economic prospects around the Mediterranean will generate a flood of economic refugees northwards, with Italy as the first stop. Says the diplomat. 'We don't want to put up a wall, but we can't cope with a flood of people. This is why we want to see prosperity - if there are reasonable expectations, then people are happy to stay at home.'

One problem impeding the hopes of a rapid economic turnaround is the legacy of historic debts and the difficulty of maintaining trade levels. Italy has just reached a Paris Club agreement with Algeria to reschedule nearly $2,001) million in overdue payments, but is in no hurry to restore the inter-governmental credit lines or export insurance that lubricated a buoyant two-way trade in the past. That generosity left export credit agency SACE with more medium and long-term exposure to Algeria than to any other country (see Trade).

Despite the Barcelona budget for boosting regional development, some observers feel Europe is making inadequate provisions and should do more. 'It was a big initiative, but it is worth looking at closely,' says Sergio Marini. president of the Italo-Arab Chamber of Commerce. 'There is no single EU view and the financial proposal for 12 countries is hardly a fortune if you compare it with US aid to Egypt and Israel.' he adds. 'It's hardly enough for a zone which Europe has designated as being of critical importance for stability.'

To such long-term promoters of Italo-Arab relations, Europe must adopt a more assertive attitude towards its neighbours. 'If Europe wants to help develop Eastern Europe, the Mediterranean, and the Middle East and its future depends on the development of its neighbours - it must enlarge the region to include the Gulf region,' says Marini. 'Europe is the top supplier, but not the chief importer from the region. We need a bigger political presence and influence there.'

As the new government settles into office, the importance of reviving Italy's European credentials is clearly uppermost in the prime minister's mind. A return to the ERM and the restoration of national finances will come before any rethink of its attitudes towards the Middle East. Diplomats looking to foreign minister Dini's agenda are not expecting the Middle East to be a major feature. Says one, 'I'm sure the Middle East will be on the schedule, but in the end it's up to the business people to go.' And, in business, Italy continues to turn in an impressive performance in the region, without much help from the authorities.

Exchange rate: $1= IL 1,539.10 (June 1996)