Immediately after the French "non" to the EU constitution I questioned the sustainability of economic and monetary union, not least in the light of the huge Italian public sector debt burden. It nonetheless came as a surprise when Italian government ministers publicly floated the idea of a return to the lira, since Italy would face a swingeing interest rate penalty on a voluntary exit from the union. The real question is surely whether Germany, which can ultimately be relied on to do the right fiscal thing, wants to remain in a club that contains Italy, which cannot.

Charles Goodhart of the London School of Economics has since argued, in response to an article by my colleague Martin Wolf, that the cost of leaving a currency union need not be prohibitive if devaluation is accompanied by fiscal reform. So it is worth asking whether we all underestimate the Italian capacity to pull chestnuts out of the fire. History does not inspire confidence. In the chaotic period after the first world war Mussolini's fascist government returned a messy budget to balance by 1926 and reduced government debt as a percentage of gross national product from 75 to 50 per cent between 1922 and 1926. But this was achieved through partially explicit default in the 1926 mandatory debt conversion. Another debt conversion followed in 1934. As for the postwar period it was only the prospect of much lower interest rates in Emu that cranked up the political will to stabilise soaring government debt.