Italy fully deserves to be in. The objections I’ve heard so far are either weak, or prejudiced, or motivated by a narrow game mechanics:
• “Italy hasn’t been remarkable enough since its unification (1860)”: This is a weak argument. Italy’s golden age was the Renaissance. One could even argue that, in Civ4 terms, Italy won cultural victory back then.
• “Renaissance Italy was too fragmented to count as a major civilization, and it can be represented only by minor city states such as Florence and Venice”: This is a weak rejoinder. Ancient Greece, Medieval Germany, Celtic and Aztec society were fragmented too. Yet nobody thinks that Greece doesn’t deserve to be playable, but should instead be represented by minor city states such as Athens and Sparta. Any arguments to the contrary confuse civilizations with national states. Sid Meier’s civilizations are meant to be just that, they aren’t necessarily meant to be unified national states.
• “Europe is over-represented, Firaxis needs to make room for non-European civs”: this one is baffling. If this argument is any good all, then it applies to all European civs, not just Italy. Yet, I’ve heard nobody saying that France or Germany should be excluded because there already are too many European civs. I can hear some replying: “But Italy is second-tier!”. No, it’s not: Renaissance Italy is first-tier.
• “Italy is already in the game as Rome”: this argument is highly dubious. The game has no dynamic way of simulating the collapse of ancient cultures and the rise of modern ones. (Exception: Rhye’s mod RFC does precisely that, but for certain reasons I disagree agree with, Rhye doesn’t think that ancient Rome should dynamically change into modern Italy). Even though modern Italy may be regarded in some sense as the closest continuation of ancient Rome, the game is currently too unsophisticated to simulate such a continuation relation.
• “The Italian geographical area is already occupied by the Roman Empire”: yes, but that’s bogus reason for exclusion. By the same token, the geographical area corresponding to modern France was occupied by the Roman Empire. As it has already been noted, Civ4 allows for extensive overlap – examples: HRE/Germany and Rome/Byzantium.
The reason why Italy is not included in Sid Meier’s Civilization has nothing to do with Italy’s relative historical merits: the game mechanics is just too narrow - too few civs, no dynamic fall of ancient civs and rise of modern ones.