Italian and French Debt Costs Converge — But for Very Different Reasons
Italy’s debt risk is rooted in economics; France’s in politics. A commentary by Lorenzo Bini Smaghi
The recent convergence of Italian and French spreads relative to German Bunds has triggered mixed reactions. Italians take comfort in no longer being isolated at the bottom of the eurozone’s credit rankings — since Greece, Spain and Portugal long ago moved ahead. In France, the mood is darker: never before has the country faced such pressure on its public debt, with no easy escape route in sight.
A closer look at the data suggests more sober conclusions. The convergence reflects divergent market dynamics. In Italy, spreads have narrowed mainly because German yields have risen sharply over the past year, driven by Berlin’s fiscal stimulus, which will add more than 10 percentage points of GDP to public debt by 2030, lifting it from 64 to 75 per cent.
In France, by contrast, spreads have widened because French borrowing costs have risen faster than Germany’s. What ultimately matters, however, is not the spread but the absolute interest rate governments must pay.
Seen over three years, Italian yields are back to mid-2022 levels, at the end of the previous legislature. French yields, by contrast, are 150 basis points higher. The upshot: France’s risk premium has risen markedly over the past year, while Italy’s remains as elevated as France’s despite the recent reprieve.
The underlying drivers also differ. Debt sustainability depends on three factors: interest costs, economic growth (including inflation), and the primary budget balance. Today, Italian and French borrowing costs are broadly aligned, at around 3.5 per cent. But growth prospects diverge. France has consistently outperformed Italy; the IMF projects average annual growth of just over 1 per cent in France over the next five years, compared with only 0.6 per cent in Italy.
On fiscal balances, however, Italy has the edge. The IMF expects Rome to post a primary surplus of 0.6 per cent of GDP in 2025, while France will still runs a deficit of 3.5 per cent.
To simplify: Italy’s debt risk is mainly economic, France’s is political. Both are fragile. Without stronger growth and sustained fiscal discipline, debt sustainability in both countries remains in question.
The contrast with other European countries is instructive. Greece, Spain, Portugal — and even Cyprus and Ireland — all once dependent on EU bailouts, now borrow more cheaply than Italy and France. Their progress stems from a dual effort: not just fiscal repair but structural reforms to lift growth potential.
This should serve as a lesson for Europe’s two largest sovereign debtors after Germany. Italy cannot rely indefinitely on fiscal adjustments alone; without reforms to raise long-term growth, adjustment will remain politically fraught. France cannot expect investors’ patience to last without credible action to rein in public spending, already the highest in the EU.
The narrowing of Italian and French yields is a warning, not a comfort. It underscores that adjustment is fragile unless anchored in durable action — on both public finances and economic growth.
A first version of this article was published in the Italian daily Il Foglio
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
