Italy's continued membership of the Euro is approaching crisis. Sometime between now and Italy's 2006 election, according to Anatole Kaletsky (Times), one of two things has to happen.

…either the European Central Bank (ECB) will have to ease monetary policy decisively to make economic conditions easier for Italy to live with — or Italy will have to withdraw from the eurozone.

Italy desperately needs an easing of interest rates and a fall in the Euro's value to boost its own economic performance. As Kaletsky reminds us,

Until 1997, when the Socialist Government led by Prodi took Italy into the euro, Italy was the fastest-growing leading economy in Europe, consistently outperforming both Germany and France. Since 1998 it has lagged in every single year behind France and in all but two years behind Germany.

He warns that an Italian withdrawal, or even a serious threat to do so, could bring the whole currency crashing in ruins. The problem is caused by an assumption that Italy has given up forever the right to its own currency.

European banks — unprofitable German mortgage banks in particular — have invested hundreds of billions of euros on a leveraged basis to pick up the very modest, but apparently risk-free, profits from buying Italian bonds and going short of their German equivalents.

This means that a serious threat of Italy leaving the Euro would trigger what Kaletsky calls "a financial crisis of monstrous proportions, not only (or even mainly) in Italy but throughout the eurozone."

There is a political fact he mentions as well. It is that this issue would give Prime Minister Berlusconi a chance to campaign on an issue for which his main opponent, Romano Prodi, was responsible.