The pope was certainly correct in his judgment - maybe they should turn over the management of the Italian economy to the cardinals.

After all, a miracle is what it needs right now.

As Romano Prodi begins forming a new government after his victory over incumbent Silvio Berlusconi, there is no escaping the daunting economic challenges that Italy now faces.

No other economy in the world is in such a dire condition. Italy has the wrong currency. It is making the wrong products at the wrong prices.

It has the wrong kind of companies.

Tinkering won't be good enough. The Italian economy needs to be smashed to pieces, and reassembled from scratch, just like the British economy during the 1980s. A revolution is needed. The trouble is that it doesn't appear to be on offer.

The election result could hardly have been less decisive. Prodi looks likely to be the new prime minister, and yet he will head a coalition that ranges from the far left to the political centre, and he only secured victory by the narrowest of margins.

"There is a lot of work to be done to take Italy out of the doldrums, " Morgan Stanley economist Vincenzo Guzzo said in a note to investors last month. "I fear that politics will be reactive rather than proactive, a perfect recipe for volatility."

The bare facts of Italy's economic performance under Berlusconi make dismal enough reading.

Berlusconi came to office promising an economic miracle, including lower taxes and more than one million new jobs. And the results? Italy has twice slipped into recession, its budget deficit and debt have swelled, and the country ranks as the least competitive of the 12 euro nations, according to the World Economic Forum.

Italy's growth rate will trail the average for the euro area for a ninth year out of 10 in 2006, according to the European Commission.

Two of the traditional explanations for what ails the Italian economy can now be dismissed. A lot of Italians used to blame the lira. They had a weak, unstable currency, prone to inflation. Yet the lira has now been replaced by the euro, a far stronger currency, with strict anti-inflationary policies. And what happens? The economy just gets worse.

Then, a lot of people blamed political instability. Italians changed their governments about as often as people change their socks. Maybe what the country needed was stronger, more stable administrations? Yet Berlusconi was in power for five years. His was the most stable government Italy had since the second world war. Again, the economy just got worse.

Medium-term growth prospects seem poor, mainly because productivity growth and competitiveness remain weak, " the Organisation for Economic Cooperation and Development said in a report last year. "Italy's ageing population will act as a further drag on per-capita income growth in later decades, making harder the task of reducing both public-sector deficits and debt, while increasing the need to do so."

Traditionally, Italy was a low-cost producer within the European Union. It had small firms, in industries such as textiles, engineering and food, that could make things cheaply compared with Germany, France or the UK.

"Relatively cheap labour cost has long offered the country a competitive edge, " Morgan Stanley's Guzzo said.

"Globalisation has now sentenced the end of that growth model."

Quite so. Eastern European and Asian factories can churn out manufactured goods a lot cheaper than Italy can. The country can't just devalue its way out of trouble because of the euro.

Worse, the Italian economy is dominated by small, familycontrolled companies. It is impossible for them to restructure in the way big German companies have done. They can't build global brands like some of the giants of French industry have.

The result? They are stuck with falling market share in declining industries. Minor changes to tax rates and labour laws simply won't work. Only a powerful program of deregulation can sweep away old industries and replace them with new ones.

In the 1980s, Britain's old manufacturing economy was smashed, and a new one based on services and technology was created out of the debris.

It was a painful, yet necessary, process. Italy needs to start doing the same.

In a long career, Prodi has shown little appetite for radical measures. It is hard to believe that he can acquire a taste for them now. Yet at some point it needs to be done - because tinkering will just leave the Italian economy sinking into deeper trouble.