Student Protest
Hundreds of students wrap themselves in an Italian tricolour during a Pitchforks Movement protest in Turin on Wednesday.
Events in Italy are turning serious. President Giorgio Napolitano has warned of "widespread social tension and unrest" in 2014 as the Long Slump drags on.

Those living on the margins are being drawn into "indiscriminate and violent protest, a sterile lurch towards total opposition".

His latest speech is a veritable Jeremiad. Thousands of companies are on the "brink of collapse". Great masses of the working people are on the dole or at risk of losing their jobs. Very high rates of youth unemployment (41pc) are leading to dangerous alienation.

"The recession is still biting hard, and there is a pervasive sense that it will be difficult to escape, to find a way back to full growth," he said.

Now why might that be? Might it not have something to do with the central overriding fact that Italy has a currency overvalued by 20pc or more within EMU: that it is trapped in a 1930s fixed-exchange system run a 1930s central bank that is standing idly by (for political reasons) as M3 growth stalls, credit contracts, and deflation looms?

Mr Napolitano offers no answer. A former Stalinist who applauded the Soviet invasion of Hungary in 1956 (a youthful indiscretion), he has long since switched his ideological fervour to the EU project. He is by nature incapable of questioning the premises of monetary union, so don't expect any useful insights from the Quirinale on how to break out of this impasse.

He does concede that the eurozone crisis "has put a severe strain on social cohesion" but leaves the matter hanging, his argument unfinished, more descriptive than analytical.

Without going as far as to warn that the Italian state itself is at risk, he said the growing threat from insurrectional forces must be confronted. The law must be upheld strictly. The country must continue to be governed. "Europe is watching us," he said.

Mr Napolitano is alarmed, and so he should be. The "forconi" pitchfork revolt has taken a disturbing turn for Italy's elites. Police took off their helmets in sympathy at the latest mass demo in Turin.

This is becoming an anti-EU movement. One of the Forconi leaders has just been arrested for climbing up the EU offices in Rome and ripping down Europe's blue and gold flag.

Where this is going is anybody's guess. Citigroup says Italy will remain stuck in depression with growth of 0.1pc in 2014, zero again in 2015, and 0.2pc in 2016. If so, Italy's output will be 10pc below the former peak a full eight years after the crisis, a far worse performance than during the Great Depression.

Even if the eurozone recovers over the next three years or so, the best that Italy can hope for is stabilisation at levels of mass unemployment - 20pc if you include Italy's extremely high level of discouraged workers (three times the EU average) who have dropped off the rolls. The question is how long society will tolerate this. None of us know the answer.

Italy has for now avoided a return to "years of lead", the 1970s and early 1980s terrorism when Bologna's railway station was blown up by Fascists and former premier Aldo Moro was seized and murdered by the Red Brigades. But it is not as far away from such violence as people think. The head of the tax agency Equitalia was nearly blinded by an anarchist letter bomb in 2011. There have been repeated instances of fire bomb attacks since then.

My guess is that there will be an incident at some point - rather like the clash between French troops and dockers in Brest in 1935, when a worker was beaten to death with a rifle butt, setting in motion events that ultimately forced Laval out of power and France off the Gold Standard.

To those who keep insisting that Italy should tighten its belt and claw back competitiveness by cutting wages, I would contend that this is mathematically impossible in a climate of EMU-wide deflation or near deflation.

The reason should be obvious to everybody by now. You cannot allow the nominal debt stock to rise on a shrinking nominal base. Such a policy causes the debt trajectory to spiral upwards. Italy's debt has already jumped from 119pc to 133pc of GDP in the last three years in large part because of the fiscal austerity policies.

This ratio will soon punch through 140pc under current EMU policies, despite Italy's primary budget surplus - a level beyond the point of no return for a country with no sovereign currency or central bank. Such is the power of the denominator effect.

Just to be clear. I do not think Italy should leave the euro as a first resort. There are other steps that should be taken first, if only to build as moral and political case.

Italy can change its diplomatic strategy, pushing for a debtors' cartel of Club Med states with French leadership to seize control of the ECB and the EMU policy machinery. They have the votes, and the full legal and treaty authority to force through a reflation strategy that would change everything, if they dare.

This is more or less the new plan of Romano Prodi, Italy's former premier and "Mr Euro". He is now calling for Italy, Spain, and France to band together rather than deluding themselves that they can go it alone, and to "bang their fists on the table".

Nobel economist Joe Stiglitz echoes the theme at Project Syndicate. "If Germany and others are not willing to do what it takes - if there is not enough solidarity to make the politics work - then the euro may have to be abandoned for the sake of salvaging the European project," he said.

The ECB's Mario Draghi warned yesterday at the European Parliament that EMU exit would lead to a 40pc devaluation and a crisis that would bring any country to its knees even more brutally than has the one it now faces. This is the sort of argument always heard in defence of fixed exchange rate systems, whether gold in 1931, or the ERM in 1992, or the Argentine peg in 2001. It was was demonstrably false in the case of Italy in the 1990s when devaluation worked like a charm.

It dwells on the immediate trauma, but skips over the much more corrosive effects of perma-slump. Countries can in fact recover very fast if the exchange rate takes the strain. You could equally argue that there would a flood of pent-up investment into Italy the moment it lances the euro boil and restores currency equilibrium.

In any case, Mr Draghi's argument assumes that the ECB would let a 40pc slide happen, even when northern powers have a very strong interest in ensuring an orderly Italian exit? The ECB could intervene in the FX markets to stabilise the lira for a few months until the dust settles. That would avoid an overshoot, avoid crippling losses for German bloc creditors and exporters, and avoid a deflation crisis in Germany, Holland, Finland, and France.

What Mr Draghi is implicitly saying (without meaning to) is that the ECB would behave in a reckless fashion, punishing Italy for the sake of it, even though this would make the whole ordeal worse for everybody. It would have been nice if an MEP had asked him why the ECB would do such a thing.

What seems certain is that no democratic country will endure semi-slump and mass unemployment for ever when plausible alternatives are on offer.