The country’s coalition government is at loggerheads with the European Union over a greater financial contribution to its upcoming budget, but markets have become concerned of its worsening financial position due to its £2trillion debt – equivalent to 132 percent of GDP and the second highest in the Eurozone behind Greece.
Lega – the government coalition party partner alongside 5 Star Movement – is determined to push ahead with sweeping plans to introduce huge tax cuts and welfare spending.
Flat tax plans would cost £45bn (€50bn) a year and a basic income for the poor would set Italy back £15.3bn (€17bn), while a pension reform would cost £7.2bn (€8bn) with a suspension in VAT rises costing 0.7 percent of GDP.
On Friday, Interior Minister Matteo Salvini insisted that a government meeting called by Prime Minister Giuseppe Conte at the start of last week over the 2019 budget made good progress.
But earlier this month, Deputy Prime Minister Luigi Di Maio put the eurozone on edge after announcing the populist government would ignore agency ratings warnings and continue with its hefty reforms, putting Italians first.
Fears of an Italexit intensified last week when MEP Mario Borghezio claimed the single currency has caused the country a great deal of economic damage by only acting within the interests of the financial elite, and lashed out at the eurozone for failing to protect Italy’s small-to-medium businesses.
Speaking to Express.co.uk, he raged: “It should be clear that we don’t want to remain slaves of a super bureaucracy.
“For now we remain in the eurozone, notwithstanding the clear damages the euro has caused on our economy.”
But Lorenzo Codogno, former chief economist and director general of the Italian Treasury Department, has co-written the chapter “Why is Italexit a catastrophic scenario for jobs and savings” in the book “What happens if we exit the euro?”
Speaking to Express.co.uk, he warned an exit from the single currency would inflict a massive banking crisis, leading to “huge job losses and a destruction of savings”.
Mr Codogno said: “In the event of an exit, a banking crises and chain defaults would become extremely probable, leading to huge job losses and destruction of savings. Moreover, an exit from the euro would not solve any of the problems that Italy should face.
“Instead, it would produce dangerous financial instability. Even considering exit as a viable solution, as part of a ‘plan B’, implies the risk of constructing a self-fulfilling prophecy.
“The economic, social and political consequences would be enormous and their effects would last for many years to come.”
Mr Codogno said while there could be some immediate financial positives to Italy leaving the euro, longer-term impacts would see inflation skyrocket, causing “substantial economic pain, especially for the most vulnerable part of the population”.
He added: “Leaving the euro would indeed free Italy from the European fiscal straightjacket and allow deficit spending. Devaluation would give a boost to competitiveness.
“What people tend to forget is the side damage caused by this strategy to the economy, the chain defaults, and the financial instability.
“Devaluation, monetary and fiscal expansion would create much higher inflation, and inflation is the most unfair tax for low-income people, the same that probably now vote for the parties that have shown sympathy for such a strategy.
“It would cause substantial economic pain especially for the most vulnerable part of the population, creating social and political problems.”
The Italian government will publish its deficit and debt targets by September 27, before sending their draft budgetary plan to Brussels by October 15, with the actual budget being published by October 20.
The European Commission will then have until the end of November to issue a non-binding opinion on the budget, with a final approval expected by the end of the year.