Euro-rebuke wounds Prodi's pride

There could have been no clearer sign of the helplessness of the Italian government: when the European Commission announced yesterday that Italy was at the bottom of the class of countries hoping to qualify for the single European currency, scarcely anyone had the strength to sound indignant.

Qualifying for monetary union on time has been the policy backbone of Romano Prodi's government, and failure will almost certainly spell its downfall. But yesterday the politicians could barely put a brave public face on the Commission's conclusions. Only Mr Prodi had the courage to call them "incomprehensible". The financial markets barely reacted.

According to the Commission's calculations, Italy will be close but not close enough to the 3-per-cent deficit-to-Gross-Domestic-Product ratio stipulated by the Maastricht treaty by the end of this year. It is then set to slide backwards towards a ratio of 3.9 per cent in 1998.

The Commission report did not rule out Italy's chances, but it made clear that further deep structural changes in the economy would be necessary to put the country back in the running.

The report was a stinging assault to Italy's pride. It is hardly flattering for a G7 country to be relegated below Spain and Portugal and left floundering just above Greece in the European pecking order.

The writing has been on the wall for some time. Because of the byzantine and contradictory architecture of Italy's governing coalition, last month's mini-budget completely failed to deliver the austerity medicine that was needed, resorting instead to statistical manipulations that fooled nobody.

The same political difficulties almost scuppered the Italian-led intervention force which is now in Albania - an operation intended to boost Italy's international credibility but which has turned into banana-skin hell.

The latest slip-up was a cruel but accurate illustration of the government's general discomfort: the Italian flagship, the Vittorio Veneto, spent all of Tuesday and part of yesterday stuck on a windswept sandbank outside the port of Vlora.

Mr Prodi's only chance of survival is to undertake a massive reform of the bloated, inefficient welfare state by the end of the year. His government is willing, but the party on which he depends for his majority in the lower house of parliament, Rifondazione Comunista, opposes any cuts in public spending in the name of monetary union.

Two likely scenarios present themselves. According to the first, the impasse continues, Italy is left out of Europe and the government falls. According to the second, the Prodi government draws up a welfare reform programme, Rifondazione votes against and a crisis looms. The centre-right opposition then comes to the rescue, offers to vote for the welfare reform package but insists on the government's resignation as the price.

Either way, Mr Prodi's days are numbered. Whether Italy's prospects in Europe can be salvaged while his supporters set about the task of dumping him remains to be seen.

Leading article, page 17