Italy: Dreams of La Dolce Vita; Italians are also living in denial, say economists. And like the Germans, they see no reason to stop, despite a new leader.(Cover story)

Byline: Barbie Nadeau

If you read about Italy in the financial press, you might be excused for thinking that the days of la dolce vita, literally the sweet life, have gone very sour. The numbers are terrible: zero growth, record deficits and staggering unemployment. The main issue raised by challenger Romano Prodi against incumbent Prime Minister Silvio Berlusconi in this month's elections was this woeful record. (Never mind that Berlusconi is a self-made man worth billions; many of the other corporate titans in Italy concluded he was bad for business.) Yet--Berlusconi very nearly won. The Italian supreme court ruled last week that he fell short of controlling the lower house of Parliament by a mere 25,000 votes out of 38 million. Which shows that half of Italy voted for him, and suggests that many of those same people concluded that life in la bella Italia is still sweet.

Are they drinking too much limoncello--or Kool-Aid--or what? Can the euro zone put up with a nation largely populated by delusional optimists? If much of the country is unconvinced that change is needed, Prodi's weak leftist coalition is going to have problems trying to cajole the public into accepting tougher reforms than Berlusconi's center-right government was willing to impose, as the outgoing prime minister has been quick to note. "I think a lot of people live in denial," says Andrea Mandel-Mantello, partner of AdviCorp, an investment bank based in Rome. "There is a mentality to just get by rather than strive for more. Instead we just ...