Italy’s recent fiscal performance has been notable, with higher revenues helping to narrow the fiscal deficit toward the 3% target. NGEU resources are supporting the outlook, as they both support the economy and reduce the need for deficit-financed spending. Given that Italy remains one of the main beneficiaries of the program, it has shown a good absorption rate compared with the EU average (above 70% versus 55%). Nonetheless, the actual spending rate stands at only around 45%, implying that resources equivalent to roughly 5.6% of GDP still need to be deployed. This mismatch suggests that in the best-case scenario where Italy receives its full EUR194bn allocation by end-2026 (EUR122.6bn in loans and EUR71.8bn in grants), the positive impact on growth is likely to extend beyond 2026. Still, on the fiscal side, challenges persist in 2027, especially as grants are now accounting for capital revenues (alleviating pressures on the deficit) and upcoming election pledges could potentially derail recent fiscal discipline. 

The 2026 budget projected that the public deficit would reach -3% of GDP already in 2025 (down from -3.3% of GDP in the last official forecast and in our projection), before declining further to -2.8% of GDP in 2026 and -2.6% of GDP in 2027. Italy could therefore exit the Excessive Deficit Procedure as early as spring 2026, ahead of schedule. Government revenues have outperformed expectations despite a weakening economic outlook. While higher revenues provide some support to the outlook, normalizing employment (and thus direct tax revenues) and fading one-off measures, together with additional spending targets (i.e. defense) will further strain the budget. We expect the deficit to drop below the 3% target only in 2028, with debt remaining near 135% of GDP and interest costs to stay elevated around 3.7% despite declining policy rates. 

Business insolvencies picked up in 2025 and returned back to pre-pandemic levels. After an expected +35% y/y increase in 2025 (13,000 cases), we expect another modest +3% rise in 2026 and then a reduction to 12,700 in 2027. 

Italy's business environment faces structural challenges. Bureaucratic procedures and administrative complexity can slow business operations, while the justice system, though improving through recent reforms, still takes longer than EU peers to resolve commercial disputes. The tax system remains complex despite simplification efforts, and labor market regulations are gradually being modernized to address skills mismatches and reduce the high tax wedge. Some services sectors would benefit from increased competition, and infrastructure investment is progressing, particularly through NGEU funding. Access to finance for SMEs is improving as capital markets develop, though bank lending remains dominant. In this context, NGEU provides a significant opportunity to accelerate structural improvements through reforms and investments focused on digitalization, the green transition, and modernization. With sustained implementation, these efforts can enhance productivity, strengthen FDI attractiveness, and support Italy's competitive positioning in key manufacturing and services sectors. 

Improved political stability is supporting the outlook. Since taking office in October 2022, the Meloni government has become the third longest-serving in the history of the Republic, far exceeding the average government duration of 426 days since 1948. It is projected to become the longest-lasting government, with possible renovated support in the 2027 election. Improved fiscal prospects within a stable domestic political environment improved the country’s credit rating. In turn, this has been reflected in growing international investor interest in Italian government debt securities, with foreign-held debt showing a notable increase over the past year. The spread between Italian BTP and German Bund has also steadily declined over the past year, indicating increased market confidence. Italy continues to be an attractive destination for foreign direct investment, demonstrating remarkable economic resilience and adaptability amidst global challenges.