The heavy lifting is done – time to buy Italian stocks

At first glance, Italy would hardly seem like a dream destination for investors. Its economy is shrinking and progress on structural reforms to boost competitiveness has been slow. And that's to say nothing of its dysfunctional politicians. Nonetheless, it's worth looking below the surface.

Compared to the other troubled states, Italy is in good fiscal shape. While the overall debt pile is huge at 120% of GDP, its deficit the annual addition to its debt pile is under control.

With no banks to bail out during the crisis, its annual deficit rose less steeply than most other states. It is now back under 3% of GDP, the threshold that the EU insists its members aim for. Indeed, its deficit is expected to fall to 2.1% this year, lower than the Netherlands or France, and this estimate is unchanged from November. By stark contrast, Spain's deficit last year was 10.2%.

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Furthermore, stripping out the interest payments it pays on its debt pile, Italy is actually running a surplus: it boasts a so-called primary surplus of 2.5%. In short, says Albert Edwards of Socit Gnrale, "the heavy lifting has been done".

By contrast, the other troubled countries will still have to undergo huge "fiscal retrenchment" to get budget deficits under the 3% limit, raising the spectre of severe social unrest. Italy is in a position to tell the EU to take a "running jump" and can avoid this scenario.

Finally, says Edwards, "Italy is much cheaper than most other countries in a cheap region". In terms of the cyclically adjusted price/earnings, price/cash-flow and price/book-value ratios, the market is far cheaper than its average since 1985.

Meanwhile, a flare up in the euro crisis is likely to culminate in money printing by the European Central Bank, and looser money always bodes well for asset prices. All this makes Italy a long-term buy. The iShares FTSE MIB (LSE: IMIB) is a play on the Italian market.

Given the likelihood of further turbulence in the eurozone, however, it makes sense to drip feed money into the market rather than jump in with both feet now.

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