Italy Holds the Line on Borrowing Amid Slower Growth

The Italian government has doubled down on fiscal discipline despite sharply revising downward its economic growth forecasts, a move that underscores the delicate balancing act between austerity and economic vitality. Economy Minister Giancarlo Giorgetti’s announcement that Italy will maintain its 2025 deficit target of 3.3% of GDP—despite slashing the growth outlook to 0.6% from 1.2%—has sent mixed signals to investors. While the decision aligns with EU fiscal rules, it raises questions about how the country will navigate its towering public debt and stagnant economic momentum.

Growth Slows, Borrowing Stays Steady

The revised growth forecast reflects mounting global headwinds, including lingering uncertainty from U.S. trade policies and the ripple effects of persistent inflation. Giorgetti noted that President Trump’s temporary suspension of tariffs on Italian goods has not yet translated into tangible economic relief, leaving growth projections for 2026 and 2027 at just 0.8% annually—a stark contrast to pre-pandemic norms.

Despite this gloomy outlook, the government insists it will not increase borrowing beyond planned levels. The deficit targets for 2026 (2.8%) and 2027 (2.6%) remain unchanged, signaling a commitment to the European Union’s Stability and Growth Pact. However, this path comes with significant risks. Italy’s public debt, already projected to hit 136.6% of GDP in 2025, is set to edge higher to 137.6% in 2026 before a marginal decline to 137.4% in 2027. Such elevated debt levels could amplify market sensitivity to even minor policy missteps.

Fiscal Levers and Market Volatility

To bolster its fiscal position, Italy plans to accelerate a €20 billion state asset sell-off, targeting stakes in utilities, railways, and energy firms. Yet, the strategy faces hurdles. Global equity markets remain volatile, and investor appetite for such assets could be dampened by Italy’s stagnant economy. Giorgetti acknowledged this challenge, stating that privatization timelines may need to be “flexible” given current conditions.

Meanwhile, Italy’s borrowing costs remain a critical focus. The country’s 10-year bond yield, which spiked above 4% earlier this year amid political instability, has since retreated but remains elevated compared to peers. A sustained rise in borrowing costs could force a rethink of deficit targets.

Navigating EU Scrutiny

Italy’s adherence to deficit targets is not merely a domestic priority—it’s a requirement under the European Commission’s Excessive Deficit Procedure, which monitors countries with debt exceeding 60% of GDP. While the EU has praised Rome’s fiscal restraint, the bloc’s upcoming review of Italy’s 2025 budget could test this goodwill. Any further downward revisions to growth could strain the deficit math, forcing Brussels to consider punitive measures.

Conclusion: A Fragile Equilibrium

Italy’s decision to prioritize fiscal discipline over growth stimulus reflects a calculated gamble. On one hand, maintaining deficit targets shields the country from EU penalties and preserves investor confidence. The government’s privatization push, if successful, could free up capital for critical investments. However, the risks are profound: sub-1% GDP growth for three consecutive years would deepen structural weaknesses, while debt near 138% of GDP leaves little room for error.

Investors should watch two key metrics: first, Italy’s bond yields, which act as a real-time barometer of market anxiety, and second, the pace of privatization proceeds. If yields climb above 4.5% or privatization revenue falls short, the government may face pressure to ease its fiscal stance. Until then, Italy’s fiscal tightrope walk remains a cautionary tale for markets—a reminder that in an era of fragile growth, even disciplined policies can’t always offset economic gravity.