By Gavin Jones and James Mackenzie
ROME, Feb 14 (Reuters) - Italian centre-left leader Matteo Renzi is one step away from forming a new government after he swiftly eliminated party rival Enrico Letta as prime minister. New numbers showing how slowly the economy is growing highlight the huge challenge ahead.
After Renzi and the rest of the centre-left Democratic Party (PD) leadership forced Letta's hand by withdrawing their support at a special meeting on Thursday, the prime minister handed his resignation to President Giorgio Napolitano.
Napolitano will hold two days of consultations leading to the appointment of a successor. The 39-year-old Renzi, whose PD is the biggest party in parliament, could be named premier as soon as this weekend.
Renzi, who would be Italy's youngest-ever prime minister and the third in succession to be appointed without winning an election, faces intense pressure to achieve the structural reforms that have eluded Italy for years.
Though he has long been agitating for sweeping change in Italian politics and won a landslide victory for his party's leadership in December, few had expected him to snatch power from Letta so soon.
Renzi's decision to bring down the prime minister matured over the past fortnight, according to people close to him, after mounting pressure from Italy's business lobby which has criticized the Letta government for not doing enough to help the country's struggling corporate landscape.
"The change came after a rather abnormal piece of pyrotechnics but I wouldn't waste too much time on the whys and hows of it all. The problem is this: can he help get the country moving again?" Carlo De Benedetti, one of Italy's most prominent businessmen, said at an event in Turin.
"If he can, the way the change happened will be forgotten. If he can't, that is all that will be remembered," he said.
Economic data on Friday underlined the scale of the challenge Renzi faces in using his decisive, and at times ruthless, political tactics to tackle the deep structural problems that have made Italy one of the world's slowest growing economies over the past two decades.
Statistics office ISTAT reported that the economy eked out growth of 0.1 percent in the final quarter of last year, the first rise in Italian gross domestic product since mid-2011.
The meagre scale of the increase underlines how far Italy has fallen behind other European economies including France or Spain, let alone the continent's champion, Germany.
Italian GDP was still down 0.8 percent from the fourth quarter a year earlier, and over the whole of 2013 it contracted by 1.9 percent after a 2.6 percent drop the year before.
Friday's numbers, which show how slowly Italy is emerging from its deepest recession since War Two, are a reflection of a deeply-rooted decline.
Italy is still the third largest of the euro zone's 18 economies, but it is now smaller than it was a decade ago. Over the past five years, its industrial output has fallen by 25 percent and in the southern half of the country less than half of the working age population has a job.
It has a 2 trillion euro public debt and 12.7 percent unemployment, a level not seen since the 1970s.
"I hope that a new and quicker reform drive could let Italy join the recovery we are seeing now in the rest of Europe."
Business leaders have called for quicker reforms, with an attack on stifling bureaucracy and a reduction of the heavy tax burden on employers. Renzi has promised a radical programme.
Yet the manner in which he wrested power is likely to weigh heavily on his government, politicians and business people say, and could hamper his ability to overcome the resistance he will inevitably encounter from entrenched lobbies.
Having made a name for himself as a "demolisher" of the hidebound orthodoxies of Italian politics, Renzi now looks as if he has gained office through the kind of backroom coup that characterised the old days of the postwar Christian Democratic party.
For example, scores of amendments in parliament have already held up the electoral law reform Renzi has proposed to ensure there is no repeat of the unwieldy coalition Letta struggled to lead. More problems await.
The PD leader will have to cut through the swathes of political and societal resistance that have in the past thwarted efforts to transform Italy. And as an outsider with little knowledge of the corridors of power, he might find it even harder than his predecessors.
Already Renzi's forces are likely to have to engage in a period of horse-trading with the small New Centre Right party, whose support the PD needs for its majority in parliament. The party, run by Angelino Alfano, has called for a turn right and has ruled out liberal social policies that Renzi has advocated, including gay civil unions.
Italy's new would-be prime minister may also find that European Union partners who appreciated Letta's adherence to the bloc's strict budget rules are less impressed by his suggestion that a promise of structural reforms should get Italy room to loosen borrowing limits.
"The structural reform agenda will not go away and the fiscal challenges will not go away," one senior EU official said. "The room for manoeuvre for Italy given its debt level is fairly negligible."