Italy has 2 big problems, debt and Europe

Italy continues to suffer double pressure on its public finances and, therefore, on its credibility: the burden of public debt and the reform of fiscal rules in Europe.
The two issues are actually crucial for the whole EU, with the issue of debt not only involving our country, especially after Governments have had to face emergency expenses due to the pandemic and now find themselves in total uncertainty between Israel-Hamas war, energy revolution, conflict in Ukraine ongoing for almost 2 years.
However, Italy remains under special observation by European markets and institutions.
It cannot be denied, in fact, that Italian bonds have come under heavy pressure lately.
In addition to global concerns that higher interest rates will last longer than expected, Rome's budget plans for 2024 have not calmed markets.
The Meloni government has cut growth expectations for the Italian economy for this year and next and increased budget deficit targets.
The yield on the 10-year Italian bond therefore increased on the news and in the following days stood at around 5%.
At the time of writing it recorded a 4.7%.
Higher charges to be paid to those who hold the national debt are a problem, also considering the size of the debt and the need to put more on the market to finance state coffers.
In this already complex context, the internal debate within the EU to modify the strict rules of the Stability Pact, now suspended due to the pandemic, also fits.
Italy, with its large debt weighing on growth, could be more disadvantaged than others if the austerity line wins.
This is why our country has 2 big problems to face and solve: debt and the European Union.
read also Italy avoids recession, but the future is bleak Italy and public debt: an unsolvable problem? When yesterday, 31 October, Ignazio Visco (now former governor of the Bank of Italy who will leave his post to Penetta) spoke at the Savings Day, organized in Rome by Acri, the central theme of the speech was a warning to 'Italy to control the debt.
In fact, if a debt/GDP ratio of more or less 140% is expected in 2026, the alarm is all for the years to come, as explained by Visco: “Subsequently, in the absence of interventions, the ratio will risk rising.
Looking ahead, in fact, the average cost of debt should return to levels higher than the nominal growth rate of the economy and the impacts of the aging population on social spending will become more significant" The recipe for avoiding the disaster is soon made : reduce the deficit as soon as possible, allowing for quality public spending.
Only in this way, Visco remarked, will public debt be sustainable and the savings of Italian families protected.
There is concern about national public finances, even within Italy and not only from foreign circles more inclined to criticism.
President Abi Patuanelli, for example, has proposed "a ceiling on Italian public debt that cannot grow indefinitely." Economy Minister Giorgetti himself used clear and partly alarming terms on the issue: "We must not underestimate the issue of public debt, our weak point…The alarm clock has gone off because more debt means more spending on interest and stolen resources to support business families” There is therefore the feeling that the issues of debt and public finances in order are urgent, carefully observed and can no longer be postponed to late solutions, especially in such complex, uncertain and not very reassuring economic times.
read also Countries most indebted and at risk, the updated ranking Will the EU Stability Pact overwhelm Italy? Italy could face even more economic pressure as the European Union faces a stalemate over new debt rules.
For several months the 27 EU member states have been discussing how to reform the Stability Pact.
The idea is to make it easier for governments to fix their finances, but disagreements over how to do that have dragged on discussions.
As European elections approach, however, there is growing pressure on finance ministers to reach an agreement in the coming months.
“Time is running out and the risk of a 'no deal' increases in an unfavorable context of growth and monetary policy, potentially weighing on the euro and rekindling fears of fragmentation in the EGB [European government bonds] market,” explained Davide Oneglia , director of European and Global Macro at TS Lombard.
Italy could be at the forefront of potentially alarming bond market movements.
read also Italy (and its debt) under scrutiny.
What to watch out for, according to experts The analyst highlighted that a return to old and rigorous fiscal rules that force a faster reduction of the deficit would worsen medium-term growth expectations for the EU, weighing on the euro.
This would also reintroduce a certain fear of fragmentation for peripheral bonds, especially Italian ones, all at a time of cyclical slowdown in growth, monetary tightening and a difficult global market environment.
It should be remembered that European member states have had to comply with fiscal rules that require compliance with a debt/GDP ratio threshold of 60% and a public deficit of 3%.
But these rules have often been neither respected nor applied by the European Commission, which supervises them.
In 2020, fiscal rules were frozen so that EU nations could spend on pandemic-related measures, such as job protection.
And with Russia's invasion of Ukraine in 2022, fiscal rules were maintained as governments faced new energy costs and inflationary pressures.
The suspension of these rules ends in December.
European nations will then be forced to play by the rules once again in 2024.
Looking ahead to 2025 – after three years of suspension and decades of criticism – there is pressure for the fiscal package to be reformed.
Now, as underlined by Moritz Kraemer, chief economist at LBBW, “if an agreement on new rules is not reached, as seems likely, the existing ones, currently suspended, will come into force [in 2025].
And they will be more severe than anything that is being discussed now.” Italy is warned.
The debt/EU rules combination can be a double problem for public finances and for the credibility of the country system.