Italy’s Prime Minister Silvio Berlusconi and his government have been calling for a vote of confidence in the Italian Parliament in the last several days for unpopular austerity measures totaling €25 billion. Roger Bootle and his economic staff at Capital Economics are asking themselves if Italy constitutes a credible danger to the Euro Block.

“Many years of weak growth and mountains of government debt are potential time bombs waiting to explode,” Bootle wrote in his research paper for Capital Economics.

Bootle acknowledges that at the moment, countries like Greece, Portugal, and Spain are capturing the main focus in Europe but Italy could soon take center stage in the story of European debt. “We think that the magnitude if government debt in Italy could at the end of the day drive the markets to turn their attention to Italy and the possibility for national bankruptcy is very real,” he added.

Bootle notes that “If market pressure continues and growth remains weak, it could advance one or two counties in the Euro Block to go bankrupt and separate from the Block. We think that the Italian administration would be under intense pressure to do the same.”

Nevertheless, Bootle emphasized that Italy is undoubtedly in a better situation than Greece or Portugal, but it has its own serious problems. “The Italians have a banking system that functions reasonably well, and a relatively low measure of public debt,” Bootle noted.

“Since the 70’s, the Italian government has consistently lived beyond its means and public debt rose to levels of around 115% of GDP, more or less along the same lines as Greek debt. Furthermore, ever since Italy joined the Euro Block, its competitive ability has diminished,” Bootle added.

Tangentially, Bootle warned that “If Italy goes bankrupt and investors in its government debt demanded a 50% cut, it 80% of Italian banks’ capital would be erased in one shot and it would cause severe turmoil in its banking system—the losses to investors would stand at €400 billion.”