Italy, the eurozone's third largest economy, could possibly seek a bailout from the European Union (EU).

And the country's Prime Minister Mario Monti said the EU has the capacity to make important decisions to guarantee the bloc's stability and live up to expectations.

Economy Report explains.

Monti made the comment after he met with Swiss President and Finance Minister Eveline Widmer Schlumpf in Rome.

Monti says the EU has realized that important decisions need to be made in order to guarantee the financial stability of the eurozone by all means.

He says the leaders discussed "prospects of the EU in the run-up to the important meeting of the European Council later this month, whose main themes will be financial stabilization and growth."

He adds that Italy and Switzerland were considering double taxation and information exchange to intensify the fight against tax evasion.

According to the internal revenue service, Italian deposits currently hidden in Swiss banks amount to 150 billion euros.

Economists have given the Italian Prime Minster Mario Monti good grades.

He's been able to push through some structural reforms to Italy. However, experts emphasize that more decisive action is needed.

SOUNDBITE: GIAN LUCA CLEMENTI, NYU STERN SCHOOL OF BUSINESS
"If the government manages to push through new cuts then the country has a good chance. So I think really we have a few months. But say, 3 months from now, let's say in six months from now, we are at exactly the same stage in the sense that the government hasn't done anything to shore up the problem of public finances and at the same time, as I expect, the country still is in a recession, then it may be in trouble -- very big, big trouble."

Some experts believe that one of the reasons for Italy's financial woes is, as in many European countries, an overinflated public sector.

SOUNDBITE: GIAN LUCA CLEMENTI, NYU STERN SCHOOL OF BUSINESS
"Italy is a country of 60 million people, 3.5 million work for the government. The government has 3.5 million employees. And many of these employees arguably are now employed at a very low level of efficiency. So a candidate for reducing expenditure has really to reduce government employees and this is something that people just don't want to hear but I don't think there is an alternative actually."

Italy's public debt currently accounts for 120 percent of gross domestic product (GDP).

Official statistics have confirmed that in the first quarter of this year, Italy's GDP slumped 0.8 percent, the biggest fall in three years.

Economists and market analysts are also voicing concerns that Italy might be the next domino to drop.

SOUNDBITE: GIAN LUCA CLEMENTI, NYU STERN SCHOOL OF BUSINESS
"If the country does not cut government expenditure by a few point percentage points there is a real danger that the country is going to have to ask for help from the European authorities and the IMF. The Italian economy is about 50 percent bigger than Spain so we are talking about serious financial concerns for the EU. I mean, Italy going down can reasonably lead to the Euro one going down."

The Organization for Economic Cooperation and Development says considering the European economic situation and austerity measures taken so far, Italy's economy will continue shrinking until the end of 2013.

Italy's banking system has remained stable, and does not have to endure the collapse of a property bubble like Spain.

Moreover, the banks in Italy have not requested any bailouts since the financial crisis began in 2008, and several major banks have successfully recapitalized since last year.

However, those banks hold a fair amount of Italian bonds, which will probably increase their exposure to a debt crisis.

Moreover, years of uncontrolled government spending and fiscal irresponsibility have driven the country into a deep financial slump.

SOUNDBITE: GIAN LUCA CLEMENTI, NYU STERN SCHOOL OF BUSINESS
"Italy suffers from many of the issues that affected Greece. For example main fiscal evasion, Italy is well-known to have this problem, not to the extent probably of Greece but still it is an important one. And the other main issue is corruption, so both countries are afflicted by corruption. There is no single day that goes by that a new scandal actually erupts."

The U.S. ratings agency Moody's last month downgraded 26 Italian banks including the two biggest, UniCredit and Intesa Sanpaolo.

The action came as net profits declined and troubled loans and loan-loss reserves roiled the banks.

A Moody's report released Monday warned that Spain and Italy would be highly reliant on European Central Bank funding after a bailout of Spain's banks was arranged during the weekend.

Furthermore, analysts believe an increased possibility of Greece's exit from the eurozone would probably lead to a downgrade of Italy's sovereign credit rating.