Waving or drowning?

It was like a rerun from the bad old days of Italian politics, when governments came and went at the rate of more than one a year. Prime Minister Silvio Berlusconi resigned last week after a disastrous showing by his center-right coalition in local elections. One partner, the Union of Christian Democrats (UDC), withdrew its ministers; another, the National Alliance (AN), threatened to do likewise. So Berlusconi quit, but quickly formed a new government by reshuffling his Cabinet. He appointed former Treasury Minister and Berlusconi loyalist Giulio Tremonti as deputy PM in place of UDC chief Marco Follini, who has distanced himself from the floundering leader. The Prime Minister had enjoyed the longest uninterrupted span in power since World War II, but his popularity has taken a hit and now he will struggle to make badly needed economic reforms before the next elections, which must be held by May 2006.

The touchiest issue within the coalition is a proposed change to the constitution to give more power to Italy's regions. Voters in the underdeveloped south, where the UDC and the AN draw much of their support, fear that will mean cuts in state subsidies. But another coalition partner, the Northern League, touts devolution as a way to lower taxes on the prosperous north. Berlusconi has tried to satisfy these divergent interests by giving something to everyone, including €6 billion in income tax cuts along with increases in public spending. Result: a growing budget shortfall, which the European Commission warns will equal 3.6% of Italy's GDP in 2005, well above euro-zone limits.

"Berlusconi wanted to be like Bush, pursuing an expansionist policy by running a deficit," says opposition MP Enrico Letta. Having patched over coalition differences, the PM is playing it safe — he's stopped calling for income tax cuts, and though he dare not renounce the League's federalist goals, prospects for action on that front have dimmed. For the next year, Berlusconi's main mission will simply be to survive.