BusinessWeek: April 11, 1994

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CAN THE `ITALIAN MIRACLE' WITHSTAND BERLUSCONI'S DEALMAKING?

Silvio Berlusconi's Forza Italia promised voters a "new Italian miracle" following the purge of the political establishment in a huge corruption cleanup. It certainly pulled off a remarkable feat in the Mar. 27-28 national elections. Formed only three months ago, Forza Italia led a right-wing coalition that crushed its centrist and leftist rivals, considered a shoo-in just a few weeks earlier. It was one of the most startling political upsets in recent memory.

But Berlusconi, 57, still faces huge challenges. Namely, can he dominate the new government the way his $6.2 billion Fininvest group dominates Italian commercial TV, publishing, retailing, and advertising? Based in Milan, Berlusconi has acquired a fearsome reputation as a no-nonsense, sometimes autocratic boss. But he'll need to show more subtlety to continue his political success.

Berlusconi's cobbled-together coalition is far from solid. With 366 of 630 seats, Forza Italia controls the largest parliamentary bloc. But to maintain a clear majority for a stable government, Berlusconi needs to rely on two seemingly irreconcilable coalition partners: the conservative National Alliance, led by neofascist Gianfranco Fini, and the federalist Lega Lombarda, headed by fiery populist Umberto Bossi. After the vote, while noisy right-wing victory rallies in Rome and Milan were still winding down, Bossi launched a withering verbal attack on Fini, calling him the head of the "reactionary right."

MINEFIELDS. A dangerous rivalry has also emerged between Bossi and Berlusconi. Although the Lega helped bring down the corrupt old guard in Rome, many of Bossi's supporters in the wealthy North are deserting to join Forza Italia. Bossi is wary of backing a Berlusconi bid for the Prime Minister's office for fear it would help marginalize his own movement.

While a deal to form a new government is likely by mid-April, a Berlusconi-led coalition could still find the going tough. Although trends such as lower inflation and an export boom point to an end to Italy's worst recession since World War II, the markets have turned jittery, reflecting worry that Berlusconi may go for quick fixes such as tax cuts and fiscal incentives to reduce Italy's 12% unemployment. Analysts wonder whether he has the stomach to cut Italy's massive budget deficit and restructure state industry. "I'm worried about Reagan-style, feel-good solutions," says one leading policymaker. "Our problems go deeper than that."

Another minefield is the potential for conflicts of interest in a government led or dominated by Berlusconi. Fininvest pumped millions of dollars into his campaign, and scores of company executives have been seconded to the Forza Italia campaign and movement. Furthermore, an aggressive acquisition program has swelled Fininvest debt to $2.2 billion--the bulk of it held by state-owned banks such as Rome's Banca Nazionale di Lavoro. "There just aren't precedents in any other Western democracy for this mix of business and politics," says Emilio Rossi, head of DRI/McGraw-Hill in Milan. The problem could be reduced if Berlusconi sold off various business ventures, as he now promises to do.

And Berlusconi has other cards to play. The Milanese media king exudes a Reaganesque, can-do optimism, which could be just what Italy needs as it begins to rebuild a political system shattered by corruption scandals. Pro-business policies, no doubt, may help spur the recovery. And Italy now has a built-in safety valve: It can throw the rascals out--an ability completely lacking under the old regime, which collapsed under the weight of thousands of indictments. This new possibility of changing the guard is the real Italian miracle.

EDITED BY STANLEY REED John Rossant in Rome
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