(April 3): Italy’s deficit breached the European Union’s (EU) ceiling last year in the biggest fiscal setback for Prime Minister Giorgia Meloni’s government since she took office in 2022.
The shortfall was 3.1% of gross domestic product, according to data published on Friday by the national statistics institute in Rome, confirming a preliminary estimate.
While that’s an improvement from 3.4% in 2024, it remains above the EU’s 3% limit aimed at keeping public finances in check.
Meloni was hoping the shortfall would be lower, thus opening the door to Italy exit the bloc’s Excessive Deficit Procedure (EDP), a monitoring regime featuring a list of shame for countries with big deficits. Formal confirmation will follow with a verdict from the European Commission in June.
The result is another blow to Meloni as her government reels from the Iran crisis and the recent loss of a referendum on judicial reform. She and Finance Minister Giancarlo Giorgetti had worked hard to keep the shortfall low to bring the country closer to exiting the EU’s monitoring regime for bloated budgets.
Shaking off that scrutiny system would have made it easier for Italy to expand defence spending at a time when Meloni has committed to meeting a Nato goal for military outlays of 5% of GDP to satisfy the demands of US President Donald Trump.
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Nations with high deficits endure tighter scrutiny by Brussels under the EDP. Fines can be levied if they don’t meet fiscal targets agreed with the EU Commission.
Last year, about a third of EU countries accounting for roughly half of its population were in violation of the rules. They included France, Belgium, Poland, and Austria. France’s shortfall exceeds 5% and may not reach 3% until 2029, according to government forecasts.
Fallout on economies from the Iran war may further toughen the task of trying to improve their finances, including for Italy.
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The government is already likely to cut its growth forecast for this year to as low as 0.5%, people familiar with the matter told Bloomberg last month.
An extended war could weaken expansion yet further and keep the deficit above 3% this year, complicating Italy’s exit from the EDP, Scope Ratings analysts Alessandra Poli and Carlo Capuano wrote in a report last month.
That would be a serious setback for Meloni, who has so far won plaudits from multiple credit assessors for Italy’s fiscal progress. Among them was Moody’s Ratings, which last year delivered its first upgrade for the country in more than 23 years.
That company said last week that Italy’s path of continuing fiscal repair remains achievable if the conflict ends soon, but that a protracted war would result in a more adverse scenario, given the economy’s high exposure to Gulf region energy imports.
The country is currently the EU’s second-largest gas consumer after Germany, relying on the fuel for about 40% of its energy mix.
Investor concern has mounted in recent weeks. The spread between Italian and German 10-year bond yields, a measure of risk in the region, spiked above 100 basis points (bps) last week, up from a low of 57bps in January. It was below 90bps on Friday.
The current level is considerably below the levels exceeding well over 200bps when Meloni was first elected, but is still a warning sign for the government that will increase its borrowing costs.
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