The King and His Cars.(Giovanni Agnelli)

It's been a bad year for Giovanni Agnelli, the ailing king of Italian industry. This spring the Rome press was writing eulogies for the Fiat founder after he failed to appear in public for several weeks. Worse, false news of his death sent Fiat stock soaring on the hope that the faltering conglomerate, Italy's largest private employer, would be better off without him. As it happened, the 81-year-old tycoon was in New York undergoing treatment for a prostate condition; he returned this month to new rumors, this time that he had come home to die. More likely, he's come home in a last ditch attempt to save his empire.

Once the pride of Italy, Fiat looks increasingly like just another old family business, out of step with a changing Europe. On a continent where trade barriers are falling and brand loyalty has increasingly little to do with nationality, Fiat's flagship auto business is losing market share--even at home--to foreign rivals. For decades it was Europe's largest and most profitable carmaker, but Fiat is now 6.6 billion euros in debt and lost 549 million euros last year alone. How to save this Italian icon is a subject of hot debate from the prime minister's office to Parliament and the inner sanctums of Fiat and the Agnelli family. The question: should Fiat sell the car business to General Motors, which is already a part owner? The latest drama came after Fiat chairman Paolo Fresco praised the "absolute loyalty" of CEO Paolo Cantarella, who resigned just days later, citing the best interests of Fiat.

The confusion reflected the national disarray over industrial policy. Normally an advocate of modernizing the Italian economy, Prime Minister Silvio Berlusconi has suggested a new subsidy for the car "industry"--a dodge around European rules against propping up individual companies. Fiat is the Italian car industry. It is also the nation's largest private employer, accounting for 5 percent of GDP. To many Italians, selling Fiat Auto to General Motors would be like giving up espresso for American coffee. That's why Berlusconi might swallow market principles to save Fiat Auto. He could also spin the bailout as a blow of sorts for reform: Italian business schools use Fiat as a model conglomerate, in part because it has been relatively free of corruption.

The loudest opponents of a bailout are Italy's powerful unions, which typically fight to keep local industry in Italian hands. In this case, they believe Berlusconi (himself a major industrialist) and Agnelli are working to undermine the unions. Fiat has already announced that more than 3,000 jobs will be ...