Italy is a slow-motion train wreck but would it quit the euro? | Nouriel Roubini and Brunello Rosa

It must choose whether to stay shackled by the euro or try to reclaim economic sovereignty

The possibility of a populist, Eurosceptic government coming to power in Italy has focused investors' minds like few other events this year. The yield differential, or spread, between Italian and German bonds has widened sharply, indicating that investors view Italy as a riskier bet. And Italian equity prices have fallen - particularly in domestic bank shares, the best proxy of country risk - while insurance premiums against a sovereign default have increased. There are even fears that Italy could trigger another global financial crisis, especially if a fresh election becomes a de facto referendum on the euro.

Even before Italy's March election, in which the populist Five Star Movement (M5S) and the right-wing League party captured a combined parliamentary majority, we warned that the market was being too complacent toward the country. Italy finds itself in more than just a one-off political crisis. It must confront its core national dilemma: whether to remain shackled by the euro or try to reclaim economic, political, and institutional sovereignty.

Related: If Brussels doesn't budge, calamity beckons for Italy - and the EU | Owen Jones