Should Italy leave EMU?

The fact that Italy’s economic under-performance is linked to the weakness of its external sector prompts the question of whether Italy should leave EMU to allow its currency to depreciate and regain competitiveness. This Focus presents a number of simulations which demonstrate that this could lead to a substantial deterioration in Italy’s fiscal position, unless Italy is able to maintain the confidence of financial markets and keep long-term interest rates low. Even then, leaving EMU could still cause major disruption to corporate sector balance sheets and the wider financial system.