Judicial Uncertainty and FDI: How Italy's Institutional Struggles Shape European Market Stability

In 2025, Italy stands at a crossroads where its judicial independence, political polarization, and foreign direct investment (FDI) trajectories intersect in ways that could reverberate across Europe. The ongoing legal saga surrounding Matteo Salvini, the country's deputy prime minister and a linchpin of its right-wing coalition, has become a microcosm of broader institutional tensions. Salvini's acquittal in the 2019 Open Arms migrant ship case, now under appeal at the Supreme Court, is not merely a political trial but a litmus test for the resilience of Italy's judiciary—and by extension, its appeal to global investors.

The Salvini Case: A Legal and Political Flashpoint

Salvini's 2019 decision to block the NGO rescue ship Open Arms from docking in Lampedusa—keeping 147 migrants at sea for 19 days—sparked a legal firestorm. Prosecutors argue his actions violated international maritime law and constituted “kidnapping,” while Salvini frames the case as an attack on his authority to enforce immigration policy. The acquittal by a lower court in December 2024 was swiftly challenged by prosecutors, who bypassed standard appeals and took the case directly to Italy's Supreme Court. This move, described as “surreal” by Prime Minister Giorgia Meloni, underscores the deepening rift between the government and the judiciary.

Salvini's rhetoric—calling for the “reform” of the judiciary and dismissing court rulings as “political”—has drawn sharp rebukes from the International Commission of Jurists (ICJ), which warns that such statements erode public trust in the rule of law. Meanwhile, Meloni's government has pushed through its own judicial reforms, including splitting the roles of judges and prosecutors and introducing a random selection process for judicial appointments. Critics argue these changes open the door to political interference, while the government insists they will enhance efficiency and impartiality.

Judicial Independence and Investor Sentiment

The European Commission's 2024 Rule of Law Report has already flagged Italy's reforms as a potential violation of EU principles, particularly Article 19 of the Treaty on European Union (TEU), which mandates judicial independence. While the EU has yet to trigger formal infringement proceedings, the uncertainty is palpable. Investors, who rely on stable legal frameworks to protect their assets, are watching closely.

According to the EY 2025 European Attractiveness Survey, regulatory instability ranks as the top risk to FDI in Europe. Italy's FDI growth of 5% in 2025—a standout in Central and Southern Europe—is buoyed by its low energy costs, abundant land, and €163 billion in NextGenerationEU funding. However, the broader European context is bleak: FDI fell 5% in 2024, with 37% of firms postponing or canceling investments due to uncertainty. The survey also notes that 42% of investors view U.S. policies as a drag on Europe's appeal, while only 27% see a positive impact—a shift that highlights the region's precarious position.

The Italian government's clashes with the judiciary are exacerbating this uncertainty. The National Magistrates' Association's strikes and the government's dismissive response have created a climate of intimidation, with judges facing death threats in high-profile cases. Such instability could deter capital-intensive sectors like renewable energy and AI, which require long-term legal certainty.

EU Scrutiny and the Risk of Retaliation

The EU's response to Italy's judicial reforms will be pivotal. While the bloc has historically prioritized diplomatic dialogue over enforcement, the Meloni government's alignment with U.S. President Donald Trump—a key EU ally—may shield it from immediate reprisals. However, the European Commission has signaled it will not tolerate violations of the EU Charter of Fundamental Rights, particularly Article 47 (the right to a fair trial).

Italy's use of its “Golden Power” law to block foreign investments—such as the recent scrutiny of UniCredit's acquisition of Banco BPM—adds another layer of risk. The EU's Pilot screening mechanism has already raised concerns that such interventions could distort market dynamics. Investors must weigh whether Italy's strategic autonomy in FDI screening aligns with their risk tolerance.

Investment Implications and Strategic Hedging

For investors, the Italian market presents a paradox: strong short-term fundamentals (e.g., NextGenerationEU funds) clash with long-term institutional risks. Here's how to navigate the terrain:

1. Sectoral Diversification: Prioritize sectors less sensitive to regulatory shifts, such as tourism and agriculture, while avoiding industries requiring prolonged legal protections (e.g., pharmaceuticals, tech).
2. Currency Hedging: Given the potential for Italian government debt volatility, hedge against the euro with instruments like EUR/USD forwards or options.
3. ESG Due Diligence: Scrutinize investments for exposure to judicial instability. Firms operating in energy or infrastructure, where regulatory approvals are critical, may face heightened risks.
4. Geographic Diversification: Balance Italian exposure with investments in other Southern European markets (e.g., Portugal, Spain), which have more stable judicial systems but similar economic incentives.

Conclusion: A Delicate Balance

Italy's judicial and political tensions are a microcosm of Europe's broader struggle to balance national sovereignty with supranational governance. While the Meloni government's reforms aim to consolidate executive power, they risk alienating both the judiciary and international investors. The Supreme Court's decision on the Open Arms case will be a critical test of whether Italy can uphold its democratic norms while pursuing economic revival.

For now, investors must tread carefully. The allure of Italy's market is undeniable, but the cost of institutional instability is rising. As the EU watches and the world waits, the line between opportunity and risk grows increasingly thin.