An irony of Italy's unfolding political and economic drama is that many of the current holders of the country's bloated and ever-increasing government debt were once proud holders of Argentina's now-defaulted sovereign bonds. As Mario Draghi, Italy's new central bank governor, warns that the Italian economy has "run aground", and as prime minister Silvio Berlusconi vents about "the euro having been a disaster for Italy" in the run-up to next month's election, one has to wonder at what stage Italy's bondholders will get the feeling that they have been to this sad movie before.

For quite aside from Italy's disturbing political and institutional weaknesses - as exemplified by the current fractious and polemical election campaign and by yet another big banking scandal that further besmirches the Italian financial system's reputation - the country's economic predicament is remarkably similar to that of Argentina in the late 1990s. Mr Draghi himself implicitly recognises this similarity when he asserts that Italy must improve its productivity performance if it is to have any hope of reversing the country's relative decline.

The most striking similarity between the two countries is the rigid currency arrangements in which they locked themselves. As a reaction to its mid-1980s experience with hyperinflation, Argentina in 1991 nailed its currency to the convertibility plan cross. It did so in the hope of forcing on the country the low inflation and fiscal policy discipline that it had never before enjoyed.

In a similar effort to impose macro-economic discipline, Italy abandoned the lira for the euro in 1999. It was hoped that high inflation and periodic lira devaluations would give way to fiscal discipline and structural reform. By abandoning its currency, Italy, like Argentina before it, gave up macroeconomic policy flexibility to stabilise its economy. Italy can no longer engage in periodic exchange rate devaluations to rectify losses in international competitiveness. And no longer having its own monetary policy, it has to accept the interest rates set by the European Central Bank even though these might not necessarily conform to Italy's circumstances. When Jean-Claude Trichet, the ECB president, recently tightened European monetary policy because of high oil prices, did he give much weight to Italy's cyclical weakness?

If this is not bad enough, under Europe's fiscal stability pact, Italy is committed to strengthening its public finances at a time of cyclical weakness. Like Argentina in the 1990s, Italy's public finances are in a real mess. With a public debt to gross domestic product ratio in excess of 105 per cent, Italy is the most indebted of the big European countries. With a budget deficit of about 4 per cent of GDP, it is in clear violation of the Maastricht criteria.

More disturbing still is Italy's lack of international competitiveness. Over the past five years, Italy has lost around 15 percentage points of competitiveness to Germany as wage increases in Italy were not matched by productivity gains. Italy's failure to modernise its industries and to move up the technological ladder has also left it exposed to the full winds of Chinese competition in an increasingly globalised economy.

Italy's loss of macroeconomic policy instruments would not be of such great moment if its economy were booming. But over the past three quarters, the Italian economy has for all intents and purposes been in recession. Under the weight of high international oil prices, this recession is only likely to deepen.

As was the case for Argentina, the only way out for Italy is to restore competitiveness through far-reaching structural reforms, especially in the labour market. However, if the present election campaign is any indication, one needs to ask how much more likely are such painful reforms in Italy today than they were in Argentina under Carlos Menem. One also needs to remember how difficult it will be for Italy to regain competitiveness in a very low inflation environment.

In the absence of real reform, the most likely scenario for Italy will be a prolonged period of economic stagnation, if not recession, and an ever increasing public debt. This will likely lead the rating agencies to again lower their Italian outlook and force the ECB to periodically bail Italy out, notwithstanding the Bank's "no bail out" clause. However, in the same way that Argentina made the mistake of forever counting on International Monetary Fund goodwill to paper over its economy's weaknesses, Italy will be making a grave error if it postpones painful market reforms and relies instead on the indefinite indulgence of the ECB.

The writer is resident fellow at the American Enterprise Institute