Agony And The Ecstasy.(World Affairs; EUROPE)(Italy)(Cover story)

Byline: Jacopo Barigazzi, Barbie Nadeau and Christopher Dickey

Italy barely functions. Yet its people are happy. What explains this?

The hottest film in Italy right now, in just about every sense of the word "hot," is "Caos Calmo" or "Quiet Chaos." It is the story of a widower who cannot pull his life together and sits on a park bench, watching the world pass him by. Sure, one reason it's at the top of the box-office charts is controversy over a sex scene (about which more later). But the movie also touches deeper nerves. The truth is that, much like the widower, Italy is watching the world pass it by.

As recently as the early 1980s, the country's gross domestic product was on a par with Britain's, and Italy looked set to be a driving force, if not quite in the driver's seat, of a newly united Europe. But those days are long gone. Luca Cordero di Montezemolo, the chairman of Fiat and president of Ferrari, likens Italian government to "a car so heavy, so expensive, so difficult to steer, so old, that whoever the driver may be, you don't win." At this point, government is not just dysfunctional, but nonfunctioning. Since left-wing Prime Minister Romano Prodi fell to a no-confidence vote in January, there's a caretaker regime marking time until new elections in April. The latest polls suggest Italy will return right-wing tycoon-showman Silvio Berlusconi to power. But that is hardly cause for optimism. The same faces have been trading places in Rome for almost 15 years as the economy has stalled and the fractious political parties have stalemated. "In Italy we are at the end of a long run," one of Prodi's close advisers said privately last week as he sat in the now half-empty offices of the prime ministerial Palazzo Chigi, "and we are all very tired."

Wherever Italians look, it seems, there are signs of rot both figurative and literal. The streets of Naples have been subsumed beneath suppurating piles of garbage for months with no solution in sight. And while Naples is stinking, Venice is sinking. Grand plans have been proposed to save the city, which is flooded nine months a year. But the 10-year multibillion-euro project put forth by Berlusconi was shelved by Prodi. Tourists overwhelm Florence, but instead of improving infrastructure, the city council is thinking of moving Michelangelo's "David" out of town to lessen the congestion. Then there's Alitalia, a fleet of albatrosses laboring under enormous debts that are emblematic of Italy's can't-do economy. In 2004 and 2005 the country's economy did not expand at all, and throughout the decade it has lagged at or near the very bottom of Europe's already torpid growth rates. Last year, Italy grew 1.8 percent, far slower than the rest of the euro zone.

Yet for all this, many Italians feel that the country still has the potential--the creativity amid the chaos--to make a magnificent comeback if only -- what? "I believe a lot of people are asking themselves the same question I ask myself," says Pino Arlacchi, a former member of Parliament and senator, and a leader of the anti-mafia fight in the early 1990s: "Why have we not succeeded in turning the page in this country?"

Giulio Sapelli, one of Italy's most distinguished economic historians, cites a handful of key decisions. "The '80s were the years of great missed opportunities," he says. Unlike France--which saw the dangers of energy shortages and built a nuclear power grid that now provides 80 percent of its electricity--Italy held an emotional referendum in 1987 that completely shut down what had been a technologically advanced nuclear industry. Now it is utterly dependent on the world market for high-cost energy. Then, Italy's public debt soared as bills for the social programs it instituted in the 1970s started to come due and political parties padded out the bureaucracy with patronage jobs. "There's huge corruption," says Sapelli. Finally, in the 1980s there was the Italian lira. The government boosted the country's exports and mollified the private sector not by encouraging research, development and innovation, but by cheapening the currency.