EDITED 18:16: I meant they SHOULD BE higher than 2.00

Italy never played convincingly under this manager even though they are ranked 15th in the world and their group stage opponents were all ranked 70th in the world or lower (beside Spain). Sweden are ranked 25th.
Some argue that there's a lack of talent in the Italian squad, but it's also true that the manager often employs tactics (e.g. 4-2-4) that all players in the squad are unfamiliar with. By watching them play, you have the distinct feeling that these players don't know what to do on the pitch.
Also, I believe that Italy's odds are heavily influenced by the fact that "it's Italy and surely they'll qualify". But at these odds, they are a a lay all day.