In order to stay a viable car firm America’s struggling Chrysler must merge with rejuvenated Italian Fiat.

It was reported a while back that Italian automaker Fiat may save America’s greatly beleaguered Chrysler. Fiat itself has made an impressive comeback from its previous days as a sinking firm, and a merger between both firms would allow Fiat to spend Chrysler executives who have experience turning around an ailing car maker.

But the executives are secondary. What Chrysler needs is nicely-designed and fuel-efficient cars. Chrysler’s lineup is so moribund that a top American auto magazine could not recommend any of its cars for 2008. That’s where Fiat can do the most good. Fiat has, first, a well-developed fuel efficient engine it can share with Chrysler. Also, the joining of production will led to an economy of scale that will save both firms money. But cars matter above all, and if the merger goes through Fiat will let Chrysler repackage its cars as, well, Chryslers and sell them in the American market.

Fiats cars will not appeal to all Americans. But there is a market for small-compact cars, especially among the young. The Fiats-repacked-Chrysler cars will also lend to Chrysler an image of cutting-edge design.

But will a deal come to pass? Fiat’s buying Chrysler is currently dependent on Chrysler getting $3 billion more from the U.S. federal government on top of billions already “loaned” to the automaker. Without the $3 billion, Fiat may not go through with the deal unless a private investor offers up the cash. Today’s credit markets do not bode well that any private investor will finance the merger.

Fortunately for both firms, the Obama administration does not have the heart to see Chrysler evaporate. And if the New York International Auto Show is anything to go by, a deal between the federal government and both firms is all but officially sealed.

Justin Lane/European Pressphoto Agency

Jim Press, the vice chairman of Chrysler, stepped out of a Fiat at the New York International Auto Show. He played up the potential merger of the two firms and boosted that the Fiat 500 [pictured above] would be right at home on the streets of New York or any American city.

Chrysler would not have done this is the deal wasn’t tentatively agreed to. So, I guess we’ll be seeing Fiats-packaged-as-Chryslers pretty soon.