ROME – Italy’s Economy Minister Giancarlo Giorgetti pledged a “responsible” approach to budget policy after the European Commission recommended disciplinary budget steps against Italy and six other countries due to their high fiscal gaps.
The EU’s announcement on Wednesday came amid close market scrutiny of Italy. The yield gap between Italian and German bonds, a measure of the risk premium investors require to hold Italian debt, has widened following European elections this month that showed rising support for eurosceptics and nationalists.
“We are aware that, given the context we find ourselves in, it is necessary to maintain a responsible approach in planning and managing budget policy,” Giorgetti said at an event in Rome. Italy’s 2023 deficit was 7.4% of GDP, the highest in the euro zone, driven by costly government incentives for energy-saving building work. Rome plans to reduce the fiscal gap below the EU’s 3% limit by 2026.
The infringement procedure requires Italy to cut its structural budget deficit—net of one-off factors and business cycle fluctuations—by at least 0.5% of GDP per year. However, the Treasury has stated that Italy is already on track to meet EU requirements, with multi-year budget projections indicating an average annual reduction in the structural deficit of around 0.7% of GDP through 2027.
“The deficit goals are those we have indicated in our budget path, which we intend to respect,” Giorgetti said. He added that Rome aims to extend temporary tax cuts for low to middle-income employees, currently in place until December, to 2025.
Italy now needs to negotiate a fiscal adjustment with Brussels that aligns with the excess deficit procedure and complies with the latest reform of the EU’s two-decade-old fiscal rules. The new rules set a steady pace of deficit and debt reduction from 2025 over four to seven years, with the longer option available if a country undertakes reforms and investments in EU-prioritized areas. Italy has consistently advocated for a seven-year adjustment path.
Being placed under a deficit reduction procedure temporarily shields Italy from an EU requirement to reduce its debt by a minimum of 1 percentage point per year. However, countries under such a procedure may not be automatically eligible for the European Central Bank’s Transmission Protection Instrument (TPI), a scheme designed to buy government bonds from countries facing market attacks.
“In the current uncertain environment, market confidence can be challenged by exogenous factors other than the management of public budgets,” Giorgetti said.