Italy’s Growth Problem Is Self-Inflicted
IMF forecasts expose structural fragilities — from public finances to energy policy — that leave the country lagging behind its European peers. A commentary by Lorenzo Bini Smaghi
The latest forecasts from the International Monetary Fund raise concerns about the European economy over the coming months. For Italy, it’s a clear warning signal.
In the baseline scenario — which assumes a swift resolution of tensions in the Strait of Hormuz — growth projections for the euro area are revised down to 1.1 per cent for 2026, around 0.1 percentage points lower than six months ago.
For Italy, the downgrade is sharper: growth is now expected to fall to 0.5 per cent, a reduction of 0.3 points and the weakest performance in the European Union.
The most worrying figure concerns growth during this year. By the end of 2026, output is projected to be 0.2 per cent lower than at the end of last year — effectively implying zero growth. Over the same period, Germany is expected to expand by 0.7 per cent, France by 0.6 per cent and Spain by 1.6 per cent.
Italy has once again become Europe’s laggard.
These are forecasts, subject to considerable uncertainty — particularly regarding the geopolitical outlook. Yet IMF analysis suggests that, should international conditions deteriorate, Italy would be among the countries most exposed.
There are several reasons for this, all rooted in policy choices made over recent years.
The first concerns the fragility of public finances. The fiscal deficit declined to 3.1 per cent of GDP last year, helping to narrow the risk premium on government bonds — the so-called spread.
Yet public debt continued to rise, reaching 137.1 per cent of GDP. IMF projections point to a further increase over the next two years, up to 138.8 per cent.
A subsequent decline, expected in 2028, hinges on the country’s ability to raise the primary surplus — i.e. excluding interest payments — from 0.5 per cent last year to 1.6 per cent of GDP. This will be politically challenging.
This situation is largely the result of the heavy borrowing in the post-pandemic period, disconnected from the capacity to spend effectively in ways that would enhance the country’s growth potential.
Public resources were deployed to finance bonuses, temporary subsidies and early retirement schemes, without generating lasting effects.
Italy issued more debt than any other country to fund its National Recovery and Resilience Plan, on the assumption that such debt was inherently “good”. The costs are now becoming apparent.
A second source of fragility lies in the way fiscal adjustment has been pursued in recent years — primarily through higher revenues, often based on one-off measures, rather than through a structural review of public spending aimed at improving efficiency and fairness. This approach has further weighed on economic growth.
Six years after the pandemic crisis, the Italian economy has returned to low growth and limited resilience, with little fiscal space to counter the effects of a potential downturn.
Another underlying weakness is the lack of competitiveness across markets — from goods and services to labour — compounded by an increasing administrative burden that hampers business expansion.
The persistent delay in implementing structural reforms long advocated by international institutions — from the IMF to the European Union — explains the stagnation in productivity and, consequently, in wages and household purchasing power.
A particularly telling example is the energy sector. Italy is the European country most affected by rising commodity prices, largely due to its dependence on imports. Following the energy crisis triggered by the invasion of Ukraine, policy efforts have focused on diversifying sources of supply — especially gas — rather than reducing overall dependence. Authorisation procedures for new renewable energy projects have become more complex, partly due to local authorities.
Meanwhile, recent measures aimed at lowering energy production costs from fossil fuels — by shifting the burden onto the distribution system and ultimately consumers — risk paradoxically increasing reliance on imported gas. They also undermine the benefits of past investments in renewables, where production costs are now lower.
In short, Italy continues to hurt itself — while blaming others.
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.
