Italy’s Budget Calm Reassures Markets

Italy’s coalition government has reached a temporary truce over its 2025 budget, easing the political friction that recently unsettled financial markets. The Treasury’s fiscal framework projects GDP growth of about 0.5 percent and a budget deficit of 4.4 percent of GDP—slightly better than earlier forecasts—signalling a pragmatic blend of fiscal restraint and political compromise.

Prime Minister Giorgia Meloni and her coalition partners agreed to delay significant tax cuts until 2026 to align with European Union fiscal benchmarks. The move reassured investors, narrowing the 10-year BTP–Bund spread to 174 basis points, its tightest level in two months. The FTSE MIB index rose 0.8 percent, and the euro (EURUSD 1.09) held steady. Moody’s reaffirmed Italy’s Baa3 credit rating with a stable outlook, highlighting improved debt-servicing efficiency and greater policy coherence compared to last year’s turbulence.

Economists describe the budget stance as balanced—neither contractionary nor expansionary—emphasizing the government’s effort to preserve credibility while sustaining investment through the Piano Nazionale di Ripresa e Resilienza (PNRR) recovery plan. The programme’s infrastructure projects continue to underpin construction and public investment, even as private consumption lags under high borrowing costs.

Italy’s public debt remains elevated at 137 percent of GDP, leaving limited room for fiscal slippage, but the recent policy coordination within the coalition has reduced immediate concerns of instability. With EU oversight softening and markets responding positively, Rome appears to have gained breathing space ahead of its mid-2026 electoral cycle.