Euro Prophet of Doom: Beware Italy's Grey Economy

Italy is a ticking bomb in the euro zone because of its big grey economy, Edward Hugh, and economics blogger nicknamed "Europe's prophet of doom", told CNBC Friday.

"They have a huge informal economy. Informal economies don't pay taxes but people eventually show up as they get older looking for pension and looking for health care," Hugh said.

Statue and Italian Flag in front of Vittorio Emanuele monument.
Ian Cumming | Getty Images
Statue and Italian Flag in front of Vittorio Emanuele monument.

Italy's debt has risen to 115 percent of gross domestic product (GDP) because of this and the problem needs to be tackled, he added.

"Italy is a time bomb there, as far as I can see, ticking away, in the sense that they can't get this under control," Hugh said.

Spain is "too big to fail" but the two most pressing questions are how will the Spanish economy go back to growth and what will happen to the European Central Bank's interest rates, he added.

"The biggest risk to the Spanish banking sector is the mortgage loan book of the individual Spanish householders," Hugh said.

Hungary's crisis is an indicator of what could be in stock for peripheral euro-zone countries, because Hungary cannot devalue its currency too much because most of loans are denominated in foreign currency, so its economy is suffering, according to Hugh.

"You got a good example out in Eastern Europe of what might happen in Southern Europe in two-three years time, in countries like Greece or Portugal or Spain if the internal devaluation process that's been supposed to take place in countries like Latvia does not work," he said.

"At that point, the German population is going to become very fed up indeed" if it has to subsidize economically depressed countries, Hugh added.

In Southern Europe, people have still not woken up to the realities of the new economic order, he said.

"People are still, to a certain extent, living in an unreal world about how serious the problems are and how we're going to get around to sorting them out."

But the problem of debt is coming up more often in day to day conversation and people are trying more to stay out of debt, which means there will not be as much growth driven by consumer credit, so exports will become very important for Europe, Hugh said.

"The biggest question is where final demand will come from? Who's going to do the borrowing and who's going to do the buying?" he said.