Following France and India, this is the latest installment in Deadline’s series of reports on the people, projects and polemics that have folks buzzing in various overseas territories.

Italy’s movie business continues to get slammed harder and harder as part of the country’s overall economic crisis. Lately, a kerfuffle over production tax credits threatens to further stymie growth while the country’s government may be on the brink of collapse given media mogul/former Prime Minister Silvio Berlusconi’s legal troubles. And, the lack of a strong VOD offer continues to bedevil an industry plagued by piracy. There have been some bright spots this year including Giuseppe Tornatore’s Warner Bros.-produced The Best Offer which was well-received by audiences and awards bodies and managed to travel some. Meanwhile, local comedy Il Principe Abusivo is currently the No. 2 film at the box office for the year with over $18M in receipts, but that’s a drop from high-performing comedies of recent years. Italian industry execs are not entirely glum, and some are taking the optimistic view that crisis can lead to renewal, but caution still dominates.

Although Rai acquired Sean Penn starrer The Gunman from Studiocanal in Cannes this year – the first straight buy its made in a year – watchers say this doesn’t mean a complete shift. With traditional film partners pulling back on investing, a local distributor says, “It’s almost impossible to finance a movie today. Even if you’re lucky enough to get TV, the amount of money is a lot less than it used to be. Most Italian movies don’t travel” so they “have to make money back inside the territory.” If a movie “ends up getting recognition abroad, that’s icing. It can’t be part of your plan.”

Exacerbating the financing issue is the current production tax credit crisis. Plans are not entirely set in stone, but the government is expected to push forward with a massive cut to the annual 90M euro ($117.6M) fund that gets doled out on a first-come-first-served basis. The credits are expected to be extended for the next three years according to local sources, but the war chest will drop severely to 45M euros or less per year. Italian unions have understandably been up in arms, but an exec tells me, “Given the overall circumstances – everybody has tax cuts – I would say it’s very coherent with what’s happening in the country.” New measures should be entered into the law later this year.

What the cuts mean in reality is that “a lot of movies aren’t going to get made.” In turn, insiders believe that will impact the emergence of new talent. “Up-and-comers are having a very difficult time because fewer films are being produced, and the ones that are being produced seem to be from surefire auteurs. A lot of would-be new talent isn’t getting a shot,” I’m told.

“We’re in the middle of something that is finishing and the new has not started yet,” an exec says. Another laments the lack of strong drivers like those that helped to define Italian cinema a half a century ago. “There are some very nice Italian movies, but very few of them, and every time there’s a cinematic event like the Rome or Venice Film Festival, it’s always the same faces. They’re still talking about Fellini!” This year’s Venice Film Festival jury will be chaired by Bernardo Bertolucci, the Italian giant who has made movies at home and abroad since 1962. But it’s also the second time he’ll be jury president – a phenomenon that doesn’t come about very often at the major fests. I’m told by the festival that the choice was “symbolic” because Bertolucci is the “greatest living Italian director” and because this year is a special anniversary.

Roundly cited as the best-known among the “newer” breed of directors are Nanni Moretti, Matteo Garrone, Paolo Sorrentino, and Tornatore. The latter two have lately made movies in English, but execs caution it shouldn’t be seen as a trend. “It’s not common at all,” one distributor says. Cinema Paradiso director Tornatore, whose The Best Offer was in English, can do it “because he’s an Oscar winner and can get cast.” Another exec echoes, “English language Italian movies can only be done by big directors who have the ability to make them travel. They’re very expensive to shoot, it’s a different caliber.” Prices, folks say, have to come down. “Talent is still expecting to get their quotes, but it’s not that kind of market anymore.” Director Gabriele Muccino crossed over into Hollywood after he broke out with 2001’s L’Ultimo Bacio (The Last Kiss), but the star of that film, Stefano Accorsi, often works in France as does Italy’s most famous current actress, Monica Bellucci.

The biggest hits in Italy, where local pics take about 35% of the market, have traditionally been comedies. In the past handful of years the box office winners have involved the same coterie of talent, but seen their fortunes dwindle. This year’s Il Principe Abusivo is directed by Alessandro Siani who starred in Luca Miniero’s 2010 hit Bienvenuti Al Sud and his 2012 Bienvenuti Al Nord (respectively the remake and sequel of French blockbuster Welcome To The Sticks). Bienvenuti Al Sud was the No. 2 film in Italy in 2010, behind Avatar, with over $43M in sales. The next year, Gennaro Nunziante’s Che Bella Giornata (What A Beautiful Day) bested all Hollywood films with about $60M in grosses. Bienvenuti Al Nord scored about $33.5M in 2012, still the top grossing film of the year, but a drastic drop from the previous year’s title holder. This year’s Il Principe Abusivo, released in February, has so far taken about half of Bienvenuti Al Nord’s final haul. “Italian comedies have seen incredible box office numbers, but they’re going down. Probably because the genre is at a cultural and anthropological end,” an exec says.

Two crucial things Italian cinema needs, folks opine, are event movies. “Three or four years ago, the overall pie was larger and even average movies had a chance. People had more money.” With the middle class struggling to stretch their euros, the consensus is people will “only go out to see a big movie.” Distributors are massively dependent on theatrical returns in part because the VOD market is underserved. Among the available services are iTunes and two Italian platforms. The DVD market is also “constantly going down unless it’s an event film,” a distrib says. The government has said it is working on new anti-piracy legislation but is being cagey with details “because they don’t want to give people time to come up with arguments,” an exec says, only half-jokingly. A law could help goose the VOD market: “Until the government does something about piracy in this country, I don’t see a lot of growth in ancillary,” says a distributor.

Speaking of government brings us to Silvio Berlusconi and his latest woes. The Mediaset chief was sentenced in October last year to four years in prison for having inflated prices paid for broadcast rights to U.S. movies and TV shows via offshore companies controlled by his Fininvest. Berlusconi and other execs were then alleged to have skimmed off part of the money to create illegal slush funds. The former Prime Minister has been working his way through appeals and is unlikely to see any jail time. But the final appeal, which some thought would end up timed to after the statute of limitations had run out, was just set for July 30. If the conviction is upheld, Berlusconi will be banned from holding political office for five years. And if that happens, “We don’t have a government on August 1st,” I’m told. The mogul holds a seat in Parliament and is the leader of the opposition. Prime Minister Enrico Letta’s coalition government depends on Berlusconi’s center-right People of Freedom party which would be expected to withdraw its trust from the government on a Berlusconi conviction.

What that means for the entertainment biz is that Mediaset, which has benefited from basically getting a free ride in terms of antitrust and other rules thanks to Berlusconi’s place in politics, could be subject to any number of new laws that would be unfavorable to the conglomerate. Berlusconi has always been a controversial figure, but some in the industry hope he won’t be convicted. “He’s not a good politician but he knows how TV works,” says one exec. Another adds, “That’s why he went into politics. Why else would he? What? To run Italy?”

Whatever happens, some execs at least remain hopeful for the future. “I think a crisis can be positive. You get new ways of doing things and new ideas. We’re at the end of a cycle and very soon a new cycle will start,” says one. Another adds, “It’s in the Italian DNA to be auto-destructive, but bouncing back is in the DNA, too.”