Italy’s Planned Deficit Rebound Threatens Its Exit From EU Surveillance
A temporary fall below the EU’s 3% limit may not be enough to end Italy’s excessive-deficit procedure as borrowing rises again in 2027.
Italy’s plan to push its budget deficit below the European Union’s 3% threshold this year may not be sufficient to end the bloc’s excessive-deficit procedure. The Bank of Italy warned lawmakers that deficits are projected to rise above the limit again in 2027 and 2028, weakening the case that fiscal consolidation is durable.
Rome expects the deficit to fall to 2.9% of gross domestic product in 2026, the first reading below 3% since 2019. It then projects a rise to 3.4% in 2027 and a slight decline to 3.2% in 2028 as the government increases defence spending and responds to higher energy costs.
The complication comes from an asymmetry in EU rules. The national escape clause can prevent a temporary, approved increase in defence spending from triggering a new excessive-deficit procedure. It does not automatically allow a country already under the procedure to exit while its headline deficit is expected to climb again.
That distinction challenges a central objective of Economy Minister Giancarlo Giorgetti. Leaving the procedure would validate Italy’s recent consolidation and potentially improve its fiscal credibility. Remaining under surveillance would preserve closer European scrutiny over budgets and adjustment plans.
The European Commission must judge whether the improvement is sustainable rather than a one-year crossing of the line. Italy’s narrow 0.1-percentage-point margin under the threshold leaves little protection against weaker growth, higher interest costs or additional energy support. The Bank of Italy urged the government to monitor the final part of the year and correct deviations quickly.
Recent statistical revisions have already reduced Rome’s room for optimism. ISTAT confirmed the 2025 deficit at 3.1% of GDP after the government had hoped for a downward revision that might have supported an earlier exit. The new projections now ask Brussels to accept that part of the rebound is permissible under defence flexibility even though the formal exit test remains strict.
The fiscal choice reflects competing priorities. Europe wants member states to strengthen defence and shield households from geopolitical energy shocks. It also needs highly indebted countries to maintain credible debt paths. Italy cannot easily satisfy both goals without stronger nominal growth, spending offsets or additional revenue.
Market consequences depend on credibility more than a mechanical threshold. Italian government bonds carry a risk premium over German debt because investors assess debt dynamics, political stability and refinancing needs. A prolonged procedure does not imply a funding crisis, but it can constrain policy and keep attention on the spread.
Why it matters
Italy is one of the euro area’s largest sovereign borrowers, so uncertainty over its fiscal trajectory affects banks, bond funds and the European Central Bank’s transmission of monetary policy. The case also tests whether the revised EU framework can accommodate common defence priorities without weakening discipline.
For the government, an exit would expand political room and strengthen its claim of responsible management. For the Commission, approving an exit before deficits rise again could undermine the framework’s credibility. For citizens, the outcome influences the balance between public services, taxes, defence and energy relief.
The forecasts are not outcomes. Growth, inflation, interest rates and energy prices can change the deficit path, while the Commission’s assessment remains pending. The Bank of Italy’s warning is therefore about the burden of proof: one year below 3% may not demonstrate a lasting correction.
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