Italy seeks way out of crisis after Prodi quits

Italy's president will hold crisis talks with political leaders on Friday to see whether he can avoid calling snap elections after a no confidence vote forced Prime Minister Romano Prodi's government to resign.

Prodi stepped down late on Thursday after losing, as expected, the vote in the Senate, where he had lost his slim majority when a small centrist party pulled out of his centre-left coalition.

Under the constitution, President Giorgio Napolitano must consult party and parliamentary leaders as well as former heads of state and find a way out of the political impasse. The talks are expected to be long and difficult, as there is no consensus between the main political forces on what to do.

Napolitano asked Prodi to remain as caretaker leader until the next step is clear.

The centre-right opposition, which has a solid lead in opinion polls, wants early elections, and those could be held within the next two months.

"The Senate vote brings a sense of relief to all Italians because the country needs an efficient government," said former premier Silvio Berlusconi, sensing that he could soon return to power after narrowly losing to Prodi in elections in 2006.

"We will ask the head of state to call elections, hoping that they can take place as soon as possible."

But Napolitano is known to oppose holding snap polls under the present, messy electoral system, which landed Prodi with a tiny Senate majority and an unstable nine-party coalition ranging from Catholics to communists.

NEW VOTING RULES

The president's only other option is to see whether there is enough support for an interim government, whose main task would be to change the voting rules before an election is held.

Such a government would probably be led by a prominent political figure or a technocrat, and would need broad-based, cross-party backing.

While that prospect is favoured by Prodi's Democratic Party and even by some in the opposition, many small parties on both sides of the political divide fear that a reform of the electoral law would reduce their weight in future coalitions.

"Everyone must decide if they want to give the Italian people more instability or contribute to a new electoral law which will help governability," said Walter Veltroni, the Rome mayor anointed as Prodi's successor to lead the centre left.

Analysts said the demise of Italy's 61st government since World War Two should not hurt growth prospects, as Prodi had been too busy surviving politically to carry out deep reforms, but it could threaten a recent improvement in public finances.

Many Italians hope for electoral reform to cure chronic instability, illustrated by the fact that Prodi's 20-month spell in power was the seventh longest government in post-war Italy.

"This isn't necessarily bad news, it all depends what comes after Prodi," said Unicredit MIB economist Marco Valli. "Markets don't like uncertainty but if what follows Prodi is a stronger government, then that could be positive."