Italy’s Fiscal Rules Dilemma
How Rome could reconcile exiting the excessive deficit procedure with higher defence spending by seeking a targeted amendment to the EU’s new fiscal framework. A commentary by Marco Buti, and Lucio R. Pench
The 2024 reform of the European Union’s fiscal rules places renewed emphasis on the sustainability of public debt, while at the same time creating incentives for spending aligned with European priorities, including defence.
The reform also introduced the possibility of a temporary and targeted suspension of the rules in exceptional circumstances, upon request by member states and subject to approval by the Council through a qualified majority.
Last spring, faced with the continued Russian military aggression against Ukraine and the risk of a gradual US disengagement from Europe’s defence, the European Commission invited member states to request activation of the escape clause.
This would allow additional defence spending outside the standard fiscal constraints for a period of four years, up to a maximum of 1.5 per cent of GDP annually.
Seventeen member states have so far requested and obtained the activation of the clause. Italy is not among them. The explanation lies in the specific way the fiscal rules apply to the country’s current situation.
Since 2024, Italy has been subject to the excessive deficit procedure (EDP) because its fiscal deficit exceeded the 3 per cent of GDP threshold.
Activation of the escape clause would allow the country to remain above that threshold beyond the deadline currently envisaged under the procedure (2026).
However, it would not allow Italy to exit the procedure itself, since the rules still require the deficit to fall below 3 per cent of GDP before the EDP can be lifted.
The government had reasonably expected to bring the deficit below this threshold already in 2025, allowing the country to exit the procedure in 2026 and subsequently apply for the escape clause. This strategy relied on the positive signal that exiting the EDP would send to financial markets.
Unfortunately, the final deficit figure for 2025 came in at 3.1 per cent of GDP—just above the threshold that would have permitted an exit from the procedure. Italy therefore finds itself confronting two competing priorities: exiting the EDP as quickly as possible and credibly launching the process of converging defence spending towards the ambitious NATO targets of 3.5 per cent of GDP.
Is there a way to resolve this dilemma?
A useful starting point is the recognition that the reform of the fiscal rules has accentuated an asymmetry that already existed between countries whose deficits exceed the 3 per cent threshold but are not yet subject to the excessive deficit procedure, and those—like Italy—that are already under it.
For the former group, the reform allows activation of the escape clause to prevent the opening of the procedure, even if the country does not fully meet the usual conditions required to avoid it—namely that the deficit be only marginally and temporarily above the threshold.
It is precisely this provision that enabled Germany last year to avoid being placed under the EDP, despite a deficit above 3 per cent of GDP in 2025 and projected to remain above that level in 2026.
By contrast, the reform introduced no comparable flexibility for countries already subject to the procedure when it comes to exiting it.
It would therefore not be unreasonable to correct this asymmetry through a narrowly targeted amendment to the rules—more precisely to Article 8 of EU Regulation 2024/1264.
Such an amendment would allow the abrogation of the excessive deficit procedure in cases where the escape clause is activated, provided two conditions are met: first, that the deficit has been brought close to the 3 per cent threshold; and second, that the Commission’s latest forecast prior to activation of the clause shows that the deficit would remain below the threshold once future defence spending is excluded.
The Italian government should urge the Commission—holder of the EU’s legislative initiative—to propose such an amendment. At the same time, Rome should announce its intention to request activation of the escape clause.
Success is not guaranteed, since approval of the amendment would require unanimity among member states.
Yet the political priority is difficult to dispute, and the legislative process could move quickly, as the European Parliament would not need to approve the change.
A previous version of this article was published by Il Sole 24 Ore
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.
