Italy budget deficit plans risk delaying EU procedure exit

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Italy budget deficit exit risk

Highlights

Italy's planned deficit path, peaking at 3.4% of GDP in 2027, could complicate efforts to exit the EU's infringement procedure, according to the Bank of Italy.
Rome expects to use the EU's national escape clause for 1.2 percentage points of GDP over the next two years, but the Bank of Italy cautions that assuming leniency from the European Commission is risky.
ISTAT confirmed the 2025 deficit at 3.1% of GDP, undermining government hopes for an early procedure exit and emphasizing the need to closely monitor budget targets.

Central bank flags risk in deficit path

As reported by Reuters, the Bank of Italy tells lawmakers that the government's planned deficit path could complicate the country's effort to leave the EU's infringement procedure. The central bank says European rules allow member states some leeway to exceed the 3% of GDP limit without triggering a new excessive deficit procedure, but do not provide an equivalent mechanism for countries already under the procedure to secure an exit.

Rome says this month that the deficit will fall to 2.9% of GDP in 2026, the first time within the EU ceiling since 2019. The government then expects the shortfall to rise to 3.4% in 2027 and edge down to 3.2% in 2028 as it uses flexibility granted by Brussels to increase defence spending and cushion the impact of higher energy costs.

The higher deficits reflect Italy's use of the EU's national escape clause for 1.2 percentage points of GDP over the following two years. In its budget plan, Rome says the European Commission would assess the deficit outlook regardless of the impact of that clause, but the Bank of Italy indicates that assumption should not be taken for granted.

Implications for Rome's fiscal strategy

Exiting the disciplinary procedure remains a longstanding objective for Economy Minister Giancarlo Giorgetti because it would mark a key step in validating Italy's fiscal tightening efforts. Under EU rules, even if this year's deficit comes in below 3% of GDP as planned, the European Commission still has to be satisfied that the consolidation is durable before approving an exit.

The Bank of Italy says it remains essential to monitor budget trends in the latter part of the year so any deviation from the target can be addressed promptly, given the narrow margin below the 3% threshold. Rome's chances of an early exit this year have already been hit after national statistics bureau ISTAT confirmed last month that the 2025 deficit stood at 3.1% of GDP, despite repeated government expectations of a downward revision.

Germany’s debt and deficit outlook through 2030 outlined how Berlin expects public debt to climb well above the EU’s 60% benchmark while the budget deficit stays above the 3% limit for much of the period. Our earlier article explained that the projected rise is driven by heavier borrowing for a large infrastructure push and more flexible defence-spending rules, illustrating the trade-offs EU governments face when balancing fiscal targets with investment and security needs.

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