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Rome wins credibility with investors and EU partners thanks to fiscal discipline and falling deficits, yet weak GDP growth and global uncertainty pose a challenge for the years ahead.
Italy is closing the year with a rare stamp of approval from financial markets and European institutions alike. The government’s commitment to fiscal responsibility and the relative political stability under Prime Minister Giorgia Meloni have reassured investors, pushing bond spreads to their lowest levels since 2009. Yet behind this positive assessment lies a more complex reality: economic growth has slowed sharply, and the country now faces the difficult task of reigniting momentum without undermining hard-won credibility.
According to the latest estimates, Italy’s GDP growth for 2025 is expected to reach just 0.5%, down from 0.7% in 2024 and more than half the 1.2% forecast only a year earlier. This slowdown reflects a combination of external and internal factors. On the global front, uncertainty triggered by renewed U.S. tariff threats, ongoing geopolitical conflicts, and volatile financial markets has weighed heavily on international trade and investment. Domestically, as the OECD has noted, fiscal consolidation itself has dampened growth by constraining deficit-financed spending.
Nonetheless, the consolidation of public finances was largely unavoidable. Italy’s public debt remains massive, exceeding 136% of GDP, a burden made heavier by the lingering costs of the “Superbonus” construction incentives introduced by previous governments. These factors forced Rome to tighten the purse strings. The payoff has been significant: the spread between Italian and German government bonds has fallen to around 70 basis points, translating into substantial savings on debt interest payments and improved investor confidence.
That confidence has been reinforced by a wave of positive decisions from international rating agencies, something Italy had not seen in decades. In late November, Moody’s upgraded Italy’s rating to Baa2 from Baa3, its first upgrade in 23 years. DBRS followed in October, lifting Italy back into the “A” category (A low), while Fitch had already raised its rating to BBB+ in September. These moves are crucial for a country that must regularly refinance a public debt which, in absolute terms, reached a new record of €3,131.7 billion in October, according to the Bank of Italy.
On the fiscal front, Italy has also scored points in Brussels. The deficit, currently estimated at around 3% of GDP, is expected to fall below the EU threshold, paving the way for the suspension of excessive deficit procedures as early as next spring. Government projections show a steady decline in the deficit to 2.8% in 2026, 2.6% in 2027, and 2.3% in 2028. Meanwhile, the debt-to-GDP ratio is forecast to stabilize and begin a gradual decline from 2027 onward, despite the heavy legacy costs of past policies.
The growth outlook, however, remains fragile. Trade tensions sparked during the Trump era, which resurfaced unexpectedly, have created prolonged uncertainty that few anticipated a year ago. Combined with the economic impact of ongoing conflicts, these factors have curtailed Italy’s export-driven growth model. As a result, the challenge for Italy—and for the eurozone more broadly—is to rethink its sources of growth, shifting the engine from exports to domestic demand.
This task is complicated by the broader European context. Germany, once the continent’s economic powerhouse, is struggling, posting only marginal growth after a recession in 2024. France, meanwhile, faces political instability and a rapidly rising debt ratio, now above 117% of GDP. Against this backdrop, Italy’s relative fiscal discipline stands out, but it cannot compensate alone for a sluggish European economy.
Looking ahead, a gradual easing of trade tensions is expected to support Italy’s international commerce, while diversification toward markets in Latin America, the Gulf, and Asia could reduce reliance on traditional partners. Growth is forecast to edge up to 0.7% in both 2026 and 2027, reaching 0.8% in 2028, driven increasingly by domestic consumption and investment. A key role will also be played by the spillover effects of investments funded through the EU’s Recovery and Resilience Plan (PNRR).
The government’s €22 billion budget law reflects the balancing act between consolidation and growth. While constrained by fiscal discipline, it introduces measures aimed at boosting purchasing power and investment. Chief among them is a cut to the second personal income tax bracket, lowering the rate from 35% to 33% for middle-income earners, following last year’s tax relief for lower incomes. Additional measures include incentives for businesses through enhanced depreciation allowances, new funding for digital and industrial transition, targeted labor tax relief, and support for contract renewals.
In short, Italy has regained credibility and stability. The next—and harder—step will be turning that trust into sustainable growth.
Alessandro Fiorentino