The paper pointed out it was necessary for some countries to "think more carefully about the costs and benefits of exiting", because of the high risks of a break-up of the monetary union.

While even Germany might consider such an option in order to cut real interest rates and regain control of fiscal policy, HSBC believes it is Italy who could become the prime candidate for leaving.

The main benefit for Rome would be to switch its existing national debt, currently standing at 107 percent of the country's GDP, from euros to a weaker ''new lira'' - even if this amounted to a default.

The idea to ditch the euro has recently been presented by Italy's Liga Nord party, part of the current government coalition.

The party is planning to use the bid as a major subject in its campaign for next year's parliamentary elections.

Ecofin to approve Italy's budgetary deadline

The report comes just as EU finance ministers gather for an Ecofin council meeting in Brussels today.

Italy's economic outlook will be under the spotlight, which is being chaired for the first time by the British chancellor of the exchequer Gordon Brown.

Ministers are expected to endorse the European Commission's proposal to give the country two years to cut its budgetary deficit below the eurozone's three percent of GDP limit from the current level of four percent.

The step is viewed as the first test of the revised stability and growth pact - the rules underpinning the euro.

Rome will be given four months to present measures aimed at tighting its spending, which should amount to cuts in the structural deficit by at least 1.6 percent of GDP over the next two years, according to the EU executive.

Portugal is also set to face a disciplinary procedure for its 2005 budget gap, set to come in at double the limit at six percent of GDP this year.

On the eve of the Ecofin meeting, the 12 finance chiefs of the eurozone also met as usual, this time debating the high oil prices which could lead to a drop in the EU growth forecast by 0.2 points from 2 percent and from 1.6 percent for the eurozone, according to the commission.

Lower growth could cause additional problems for countries already struggling to deal with their excessive public spending, like Germany or France.

France's central bank chief praises Blair's reform talk

Meanwhile, an increasing number of economic experts are voicing support for overhauling Europe's economic and social policies, as promoted by current EU president Tony Blair.

Christian Noyer, the governor of the Bank of France said he "tended to agree" that Europe’s social model needs to change significantly and adjust to the pressures of globalisation.

He suggested in the FT that the three Scandinavian countries in the EU prove the case that "it is not the monetary regime that eventually leads to good economic results and low unemployment. It is really the way that the economy works structurally".

Mr Noyer argued these countries success lies in a mix of a greater level of flexibility in labour and product markets, in line with the UK economy, but with a high degree of social protection, as present in continental Europe.

He pointed out that a similar model could be the answer for the current economic problems in countries such as France, Germany and Italy.

The Scandinavian model is also highly admired by the EU commisisoner for social policy, Vladimir Spidla.

His office is steering the preparation of a paper on the European social model to be debated at a special informal summit of EU leaders in late October.