The "failed" Italian banking system, not Brexit, will be the trigger that finally "unravels" the European Union, says Westpac's chief economist.
Speaking at an Association of Superannuation Funds of Australia luncheon in Sydney yesterday, Westpac chief economist Bill Evans said the Italian banking system has "basically failed".
"Bad debts in Italy are about 18 per cent of banking assets. Compare that with Australia, where bad debts are at about 0.25 per cent," Mr Evans said.
Italy's government debt as a proportion of GDP is as high as Japan's, he said – which means the Italian government has no "firepower" to prop up its banking system.
Furthermore, the Italian government is restricted by its agreements with the European Union, Mr Evans said.
"Italy sits as a much bigger problem for the world economy [than Brexit], and specifically sits there as a trigger for European instability," he said.
Mr Evans also pointed to the populist Five Star Movement in Italy, which is led by comedian Beppe Grillo and has a strong presence in Rome and Milan.
"[The Five Star Movement] was started five years ago as a bit of a joke and is now the unambiguous anti-Europe party [in Italy]," he said.
"If they win the election, [Italy is out of the European Union]. They won’t have a referendum – that would be part of their policy in any political battle."