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Investors now see Rome as fiscally prudent, while Paris risks paying more to borrow
For years, France was regarded as the model of fiscal discipline in Europe, while Italy was treated as its reckless counterpart, weighed down by debt and political instability. Today, the tables may have turned. According to Le Monde, Italy under Prime Minister Giorgia Meloni has become just as credible as France in public finance—if not more.
The French daily highlights a striking reversal: over the past three years, Rome has significantly reduced its budget deficit, while Paris has allowed its own to grow. The outcome is visible in bond markets, where the gap between Italian and French borrowing costs has nearly disappeared.
Italy’s Fiscal Turnaround
Italy, long seen as the problem child of the eurozone, has improved its standing among investors. Despite carrying one of the highest debt-to-GDP ratios in Europe, the country has embraced fiscal prudence, slowly rebuilding its reputation.
“Once considered the laggard of the European Union in budgetary matters, Italy is now in a position to give lessons to France,” Le Monde reported, citing a note by independent economist Philippe Crevel published in late July.
This shift is reflected in investor confidence. At the height of the eurozone crisis in 2011–2012, Italy’s instability was so pronounced that markets demanded a premium of 400 basis points—4% more—than France to hold Italian debt. While France could borrow at around 3%, Italy had to pay 7%.
Fast forward to 2023: that spread has shrunk to historic lows. On August 15, the difference between Italian and French ten-year government bonds fell to less than five basis points, its narrowest margin since 2005. For five-year bonds, the spread completely disappeared in mid-July.
France’s Growing Burden
France, meanwhile, has been moving in the opposite direction. Despite having a stronger starting position, Paris has allowed deficits to widen. Investors are beginning to take notice.
“The turnaround can be summarized in a single number: the interest rates demanded by investors to hold the public debt of the two countries,” Le Monde wrote. The newspaper noted that while France still does not pay more than Italy to borrow, “it may only be a matter of days or weeks” before that changes.
The warning is stark. If borrowing costs in France continue to climb relative to Italy, it would mark the first time in modern history that Paris finds itself at a disadvantage to Rome in the bond markets.
Recognition Beyond France
The shift is not just being observed in Paris. The Financial Times also recently pointed out Italy’s new fiscal credibility, attributing it to “Italian prudence” under Meloni’s government. Rome’s cautious approach to spending and deficit management has impressed international investors, contrasting with the more relaxed stance in Paris.
This perception matters. Bond yields determine how much governments pay to finance their debt. With France’s deficit rising, its debt burden risks becoming more expensive to manage. Italy, despite its higher overall debt, is now seen as more disciplined—a remarkable change given its history.
Investor Sentiment and Market Signals
Markets are quick to react to credibility shifts. The shrinking spread between Italian and French bonds reflects investor confidence that Italy will continue along its path of fiscal restraint. It also suggests scepticism about France’s willingness to rein in spending.
Analysts note that this transformation is not just symbolic. If France begins to pay more than Italy to borrow, the psychological impact on markets could be significant. It would challenge long-standing assumptions about the eurozone’s financial hierarchy and potentially reshape capital flows within Europe.
A Painful Truth for Paris
For French policymakers, the comparison is uncomfortable. Le Monde admits it is “painful for the French to hear” that Italy is now viewed on par—or above—France in fiscal credibility. Yet, from the perspective of global investors, the numbers speak for themselves.
What remains uncertain is whether this shift will prove temporary or enduring. Italy’s political and economic challenges have not vanished, but the government’s discipline has earned it breathing space. France, meanwhile, faces pressure to restore its fiscal image before markets impose harsher terms.
The eurozone’s narrative has shifted in unexpected ways. A decade ago, Italy was synonymous with instability, while France embodied stability. Now, the roles are being reconsidered. For Italy, the recognition is a milestone: proof that consistent deficit reduction and fiscal discipline can overcome a history of skepticism. For France, it is a warning: credibility, once lost, is costly to regain.
Alessandro Fiorentino