In the recent Italian elections 55% of voters voted for either Beppe Grillo's populist 5 Star Movement (motto: "They're all crooks and should be thrown out") or Berlusconi's center-right coalition that promises a return to pre-austerity Italy (and a return to power of Berlusconi, who was prime minister before he was run out of office.) What these two antagonistic factions have in common is a belief that the EU has been calling the shots and imposing crippling austerity on an Italy already in an economic depression.
Grillo has outright called for a renegotiation of Italy's more than € 2 trillion debt, which totals 127% of GDP (second only to Greece,) while Berlusconi campaigned on reversing the austerity measures that the European Central Bank required from Italy before it would help with servicing its debt. Both have talked about leaving the euro currency, bringing back the lira at a devalued rate, then paying off loans with lira.
Could Italy default on its sovereign debt and leave the euro? The last Eurozone crisis was caused by the possibility that Greece could do just that. Greece accounts for less than 2% of EU GDP, and is the 11th ranked economy in the Euro, yet the thought of Greece leaving the euro and going back to their own currency in order to compete economically led to the other EU nations paying billions of dollars to stop that from happening.
Italy is the third largest economy in the EU, and 8th largest in the world. It also has something that Greece did not have in 2012: a primary budget surplus. What this means is, that if Italy was not paying the billions of euro in debt service each month, it would be running a budget surplus. In fact, it would be running the largest budget surplus in the EU. 60% of Italy's exports are to non-EU countries, and it runs a trade surplus, so it could conceivably weather European sanctions. The positives certainly seem to be there for an Italy tired of 37% youth unemployment and shrinking disposable income. But could they pull it off? Tim Worstall goes into the details in his recent article at Forbes.
What would the EU look like after an Italian default? Would Italy stay in the EU in a manner similar to the U.K., which retains control over its own currency, yet partakes in many EU functions? Or would this be the final straw for Germany, tired of propping up all the other nations that are dragging it down? The Scandinavian countries, also tired of their citizens going without while Nordic money goes south to help bail out other countries, could form their own economic union if the EU broke up.
Italy make be the bomb that blows up the EU. Unless something very unexpected happens, we may see the euro disappear as a common currency, and the EU devolve into a simple free trade zone.