Rome sharpens its fiscal path as Brussels signals an end to the infringement once the 3% threshold is durably met

Rome —Italy is on the cusp of meeting the European Union’s 3%‑of‑GDP deficit ceiling already this year, a milestone that would mark a decisive turn in the country’s long campaign to restore fiscal credibility and pave the way for an exit from the EU’s excessive deficit procedure (EDP). Policymakers in Rome say the latest draft of the public‑finance plan points to a 2025 shortfall right at the 3% line, or slightly below, thanks to stronger‑than‑expected revenues and easing interest costs on government debt. The development follows months of quieter belt‑tightening and better tax intake, even as growth remains tepid.

The new stance represents a notable acceleration from the spring’s target of around 3.3%, and it aligns with messages from European authorities that Italy could leave the corrective arm of the Stability and Growth Pact once the shortfall is brought down and kept there. People close to the process say Brussels could formally close the infringement as early as mid‑2026, provided the 3% cap is respected and the adjustment path stays on track. For Prime Minister Giorgia Meloni, it is an opportunity to reframe Italy’s economic narrative after years dominated by pandemic‑era stimulus, energy‑price shocks and a surge in debt‑service costs.

How did Italy get here? First, the revenue side outperformed. A still‑resilient labour market, nominal wage drift and better compliance boosted income and consumption taxes. Second, the cost of servicing the debt—while high by historical standards—has been less punishing than feared as markets priced in a plateau for euro‑area interest rates and the Treasury lengthened the maturity profile. Third, the government slowed the expansion of primary spending, prioritising targeted relief over broad brakes that could smother growth outright.

The deficit arithmetic is only part of the story. Italy remains constrained by a growth rate that forecasters peg around 0.5%–0.6% in 2025, with 2026 just shy of 1%. Investment tied to EU Recovery and Resilience Facility projects is still the principal prop, while consumer spending looks cautious and exports have been challenged by a softer global cycle and new U.S. tariffs that have weighed on Italian shipments. That backdrop helps explain why Rome has chosen to protect selected tax cuts for middle‑income earners and keep public‑investment commitments intact, even as it trims elsewhere.

In Brussels, the tone has shifted from disciplinary to conditional. The EU Council’s January guidance set out a corrective path for Rome, asking that the nominal growth of net expenditure be contained in 2025 and 2026 so that the deficit falls below the treaty limit and stays there. Officials familiar with the file say that if Italy locks in a 3% outcome for 2025 and shows further improvement in 2026, the EDP could be closed the following year. That would return more discretion to national authorities on the timing and shape of future tax and spending choices—though with the new, reformed fiscal framework placing greater emphasis on medium‑term debt sustainability.

Markets have been watching two gauges: the primary balance and the trajectory of the debt ratio. On the former, Italy appears set to post a primary surplus again this year, a necessary condition for stabilising debt. On the latter, the debt‑to‑GDP ratio should hover broadly stable in 2025 before resuming a slow decline as nominal growth and the primary surplus do more of the work. Continued access to EU‑linked investment funds—and the ability to execute them efficiently—remains a swing factor.

Politically, the optics of hitting 3% in 2025 are powerful. They give the government credibility in negotiations over flexibilities, including how to treat defence outlays and certain strategic investments under the fiscal rules. They also buy time for a calibrated tax‑cut agenda aimed at labour and family support, which the coalition has flagged as a priority heading into the second half of the parliamentary term. The risk is that fiscal space created by better‑than‑expected revenues proves cyclical and fades just as structural pressures—from demographics to climate‑related spending—intensify.

The macro risks are not purely domestic. A prolonged period of weak external demand would sap the industrial north; another energy‑price shock would compress household purchasing power yet again; and any abrupt rise in global yields could feed through to BTP funding costs. Each would complicate the glide path to a deficit with a ‘2’ handle in 2026. That is why officials stress the need for supply‑side measures with durable payoffs: simplifying permitting, accelerating digital and energy‑transition projects, and shoring up human capital through training and education reforms.

What would exiting the EDP change, concretely? First, it would remove the reputational drag and the formalised surveillance that comes with being under corrective procedures. Second, it could modestly lower Italy’s risk premium if investors see evidence of rule‑compliant policy anchored in a realistic medium‑term plan. Third, it would give Rome more room to tailor cyclical stabilisers without triggering warnings from Brussels, as long as debt dynamics remain on a sustainable path under the EU’s new expenditure‑based framework.

In the near term, the cabinet’s budget bill will do most of the talking. Watch three lines: the precise 2025 deficit number and contingency buffers; the composition of savings (administrative efficiencies vs. programme‑level cuts); and commitments that carry into 2026–2027, when the EDP exit would likely be formalised. Execution will matter as much as design: Italy’s past stop‑start record on public investment and reforms is the biggest wild card in the disinflationary, low‑growth environment now taking shape across Europe.

None of this diminishes the scale of Italy’s long‑term challenge. Growth potential needs lifting—through productivity, participation and capital deepening—if debt is to be brought down without permanent austerity. But the immediate task was to credibly re‑enter the EU’s rules‑based corridor. By reaching the 3% threshold in 2025, Rome has done just that, reopening the door to a controlled exit from infringement and a more strategic debate about how to deploy scarce fiscal space over the rest of the decade.

Key questions ahead:
• Will the European Commission endorse Rome’s updated plan without requesting additional safeguards?
• Can the government defend targeted tax relief while protecting growth‑friendly investment?
• Will weak foreign demand and tariff frictions fade quickly enough to avoid new slippage?
• How will the ECB’s rate path and the Treasury’s issuance strategy interact to keep funding costs contained?

For now, investors and policymakers will parse the numbers—and the fine print—of the draft budget. But the headline is already clear: Italy has engineered a quicker‑than‑expected return to the EU’s deficit limit, setting up the country to leave the corrective procedure once Brussels is satisfied that the threshold can be maintained without one‑offs and with the debt ratio on a gentle downward slope.

Notes: This article draws on current budget drafts and guidance reported by major outlets and EU institutions as of October 2, 2025.