Joined in battle for Italy's soul: The president and the prime minster are on a collision course, says Michael Sheridan

AMONG all the palaces that crown the seven hills of Rome, the elegant establishment of the President of the Italian Republic possesses the closest links to modern constitutional history. It was once the residence of the Popes and from their eyrie high on the Quirinal Hill its occupants surveyed their earthly kingdom below with a serene authority that President Oscar Luigi Scalfaro, the present head of state, might envy.

President Scalfaro behaved with dignified integrity during the collapse of the post- war Italian Republic, the season of corruption scandals that destroyed the old political parties, and the installation of the new right-wing coalition under Prime Minister Silvio Berlusconi.

But it is now an open question whether the President and the constitutional order he epitomises can survive the assault of a vigorous new ruling class propelled into office by Mr Berlusconi's electoral success and nourished by the power of his television networks. The newcomers want a complete break with the ancient system of compromise, intrigue and political balance - some would say inertia - which gave Italy more than 50 governments, yet apparent stability, between 1945 and 1994.

The first real clash came last week, when President Scalfaro sought to prevent the government seizing the power to appoint and dismiss at will the board of governors at RAI, the bloated and crony- riddled state television network. A flurry of polite yet barbed communiques ensued between the Quirinal palace and the office of the Prime Minister. But the board of RAI took the hint and resigned anyway. Mr Berlusconi, controller of almost all Italy's private television networks, now, in effect, rules at RAI as well.

Politicians of left and right opposed to the Prime Minister were appalled. Yet it is testimony to the indefensible nature of the old RAI - with each channel controlled by a different political party - that only a few voices have been raised against this coup d'etat.

'It's incredible,' said Rosa Russo Jervolino, who speaks for the renamed Christian Democrats. 'The President attempts to defend the constitution and the government reproaches him for it.' The minister involved, a former Berlusconi television presenter called Giuliano Ferrara, responded: 'There's no war going on here. There is merely a clarification of the respective roles.'

The RAI issue was important because the main shadow hanging over Mr Berlusconi's government so far has been the conflict of interest between his role as prime minister and his control of the media giant Fininvest. His protestations that he is 'seeking the most efficacious method to resolve any perceived notion of conflict of interest' have not yet been matched by a single measure to separate the private and public Berlusconi interests. Indeed, the influx of Fininvest executives and TV presenters into government office suggests that the two are becoming enmeshed.

Last Friday Mr Berlusconi gave notice of his intention to control senior appointments to the Bank of Italy. The central bank, which functions much like the Bank of England, has long been regarded as the bulwark of financial responsibility and professional competence at the heart of the Italian state. Its previous governor, Carlo Azeglio Ciampi, served as an effective transitional premier.

Mr Berlusconi has made a stand over the appointment of a deputy governor at the bank. The implications for the country's lender of last resort are of concern to the financial community. One reason is that Fininvest itself labours under a massive burden of corporate debt and thus has a vested interest in low interest rates. Another is that the Bank of Italy plays an important role in the financing of government debt, and the Berlusconi cabinet has yet to spell out how it aims to tackle yet another budget overshoot which will face Italy with a deficit higher than pounds 60bn this year. Another clash with the President could result.

Since taking office Mr Berlusconi has performed remarkably well in soothing his critics. He has introduced no landmark legislation to challenge entrenched interests and focus opposition. He has glossed over the presence of neo-Fascists in his cabinet and they have behaved politely. His intelligent and effective Foreign Minister, Antonio Martino, has charmed the British government into the alluring impression that the Berlusconi government is a collection of free-market radicals sceptical about Europe. Mr Berlusconi himself will host the Group of Seven summit in Naples this week to set the seal upon his arrival in the world's ruling club.

Behind this facade is an altogether more complex political reality. Mr Berlusconi rose through the old order he purports to deride, and emerged from its ruins with his links to the disgraced political class camouflaged by slick and bland publicity. But it would be a great mistake to write him off as simply a tycoon overburdened with debt who has every intention of enjoying power but no plans to change anything.

The Berlusconi team may not have propounded a full legislative programme. But in convoluted, Italianate fashion, it has already targeted the two great prizes for political control of the state - the television stations and the central bank.

The great gamble now for Mr Berlusconi is whether or not to push for another general election. The latest polls show that he would all but wipe out the dissipated Italian left and he might well shake off his annoying coalition partners in the Northern League. That then holds out the prospect of a new constitutional order in which the office of president would be transformed into a French- style executive, with diminished influence for the premier and two houses of parliament.

It is easy to see why President Scalfaro does not fit in to this scenario. He is a man of deep Roman Catholic faith, a Christian Democrat from the industrious north of Italy elected for his upright character to an office that signified the social consensus all post- war Italian governments held to be their ideal.

Mr Berlusconi has signalled that he intends to effect a transformation in Italy that could prove as revolutionary as the first two governments of Margaret Thatcher in Britain. The results could prove considerably more dramatic.

(Photograph omitted)