Italy: Keeping Calm and Carrying On

Despite familiar economic challenges, Italy does not currently pose risks to Eurozone stability. BTP-Bund yield spreads have tightened this year as the government has set about tackling its fiscal gap without drama; France is instead the new focus of market jitters. The Finance Ministry sees the budget deficit narrowing to 3.8% of GDP this year from 7.2% in 2023; and expects to bring it below the EU’s 3% of GDP ceiling in 2026. The government plans to raise €3.5 billion from banks and insurance companies in its 2025 budget, mostly by suspending banks’ DTA deductions. GDP growth has been sluggish, closely tracking that of the euro area as a whole since the pandemic. Strong headwinds to growth and revision of historic series data make government’s 2024 GDP growth target of 1%YoY unlikely.