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Italian Prime Minister Mario Monti shields his eyes from the light during a joint media conference with European Commission President Jose Manuel Barroso, not shown, at EU headquarters in Brussels, on Tuesday, Nov. 22, 2011. (AP Photo/Virginia Mayo)
Italian Prime Minister Mario Monti shields his eyes from the light during a joint media conference with European Commission President Jose Manuel Barroso, not shown, at EU headquarters in Brussels, on Tuesday, Nov. 22, 2011. (AP Photo/Virginia Mayo)

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Scandal tests Italy's appetite for reform Add to ...

A long-running corruption investigation into Italian state-backed defence group Finmeccanica has flared up, engulfing executives and politicians. Rome’s fragile consensus government may not be helped by a corporate crisis with political fallout.

The sudden eruption of the scandal probably has little to do with the appointment of Italy’s technocratic administration led by Prime Minister Mario Monti. But it is hardly a good start for the new leader. Mr. Monti needs to reassure markets quickly that Italy can reform its economy, including streamlining its public sector.

So far there is no proof of any wrongdoing, but the probe into political slush funds has spread to the company’s external relations director, who said he would stand aside following reports he was being investigated. The wife of the company’s chairman, Pier Francesco Guarguaglini, is chief executive of a unit involved in the investigation.

It hardly helps Italy’s credibility at a time when euro zone partners are tiring of supporting the country. The biggest risk is that the affair destabilizes the precarious balance of power needed to support the Monti administration. So far, the fact that the scandal appears to be tainting several parties, rather than any one, could mean that it remains a distraction and test of Mr. Monti’s political skills, rather than a serious rupture.

Mr. Monti’s challenge will be to use Finmeccanica as an opportunity. A scandal, if contained, would not be overly damaging, and could give a signal to markets that Italy is turning a corner. The country is estimated to lose as much as €60-billion ($84-billion) a year from corruption – roughly the same amount that it would have to pay for a three-percentage-point increase in the cost of its debt.

Finmeccanica’s share price fell more than 20 per cent last week after chief executive officer Giuseppe Orsi announced a plan to sell assets worth €1-billion to help cut debt, while scrapping its dividend. Such a politically difficult decision shows a desire to tackle the thorny issue. A reformed Finmeccanica could become the poster boy for a new wave of Italian privatizations once market conditions improve. The hope is that this painful moment marks a turning point for the company, and the country.

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