Weak economy and dire prospects of economic reform could make Italy give up the euro currency, a key German bank said Friday in a report.
The costs for Italy to quit the euro single currency at present far outweigh any potential benefits from lower prices for the country's exports that a return to the lira would bring, said Commerzbank in its report to clients.
But the Romano Prodi government's slim majority means it is unlikely to pass any meaningful market economy reforms, the bank said.
"From the standpoint of politicians this will gradually raise the political benefits of leaving the single currency," it noted, adding "There is thus a small but not to be neglected probability that Italy will leave the currency union in the coming five years. "
Such a move would throw the entire 12-nation euro-zone into a " deep crisis" and politically isolate Italy for years to come, the bank said.
Foreign debts held in euros by both the state and private industry would rise sharply after an Italian devaluation, the report said, investors would avoid Italy and interest rates would climb.
It said that the core problem of Italy is its industrial sector which has become massively less competitive regarding prices since the launch of the single currency in 2002.