Italy · Economy

Italy has halved its deficit, won back Brussels and regained the bond market’s trust, yet has almost nothing to show for it where it counts: the economy is barely growing. The Italy deficit story is really one policy wearing two faces, discipline and stagnation.

Palazzo Chigi in Rome, seat of Italy’s government, which has halved the deficit while the economy barely grows. (Photo internet reproduction)

Italy has done something in three years that most of Europe thought it could not do. It has cut its budget deficit almost in half, restored its standing with Brussels, and won back the trust of the bond market.

And it has almost nothing to show for it in the number that matters most to ordinary Italians. The economy is barely growing at all.

That paradox is a live test of a question every indebted country eventually faces: what does fiscal virtue actually buy, and what does it cost? Italy’s discipline and its stagnation are not two stories but two faces of the same policy.

The achievement, stated plainly

Start with the numbers, because they are striking. When the current government took office in 2022, Italy was running a budget deficit of around eight percent of its total economic output.

By 2024 that gap had fallen to about three and a half percent, and in 2025 the national statistics office confirmed it at just over three percent. A deficit that had been among the worst in Europe was brought to the edge of the European Union’s three-percent limit.

The reward arrived quickly. The rate markets charge Italy to borrow for ten years fell from a 2023 peak near five percent to roughly three and a half by late 2025, and the gap over safer German debt narrowed sharply.

Brussels noticed too. Italy is now in sight of exiting the EU’s formal disciplinary process for excessive deficits, potentially a year early, a milestone that would have seemed fanciful when the government began.

The engine was subtraction, not growth

Here is where the paradox begins. Italy did not close its deficit mainly by growing its economy and collecting more from a rising tide; it closed it largely by taking something away.

The single biggest driver was the winding-down of a programme known as the Superbonus. This was a lavish home-renovation tax credit, introduced before the current government, that at one point covered more than the entire cost of the work.

The Superbonus was extraordinarily expensive, costing the state a sum equal to nearly three percent of the whole economy in a single year. Its unwinding is the main reason the deficit fell so fast, alongside the end of pandemic and energy support.

That changes what the achievement means. A deficit that falls because a costly programme expires is real but finite, and once the easy savings are gone what remains is the harder task of living within your means in an economy that is not expanding.

The cost: an economy that will not move

Now the other face. While the fiscal numbers improved, the growth numbers went nowhere.

Italy’s economy grew by less than one percent in 2024, and in the second quarter of 2025 it actually shrank slightly, its first decline in two years. Private consumption has been essentially flat for over a year.

This is partly a consequence of the fiscal success, not a coincidence beside it. Money pulled out through spending cuts and expiring credits is money no longer circulating as demand.

The deeper problems are structural and long predate this government. Italy’s population is shrinking, its workforce is ageing, and its productivity growth has been weak for two decades, and fiscal discipline fixes none of it.

The hidden crutch: someone else’s money

There is a third element that complicates the tidy success story. A meaningful part of what has held Italy up is not Italian at all, but European.

Italy is the single largest recipient of the EU’s post-pandemic recovery fund, with grants and loans worth around eleven percent of its pre-crisis annual output. That external injection has quietly supported activity while the government tightened at home.

But the fund is temporary, and Italy has been slow to spend it. By early this year only about half of the money already disbursed had actually been used.

When the fund winds down, Italy will have to stand on its own domestic growth, and that growth is precisely what the past three years have failed to produce.

Why this is Europe’s most important quiet story

Step back and the significance is clear. Italy is not a small economy running an interesting experiment; it is the third-largest in the euro zone, carrying one of the largest debt burdens in the developed world.

If a disciplined Italy can only manage stagnation, that is a warning with reach far beyond Rome. It suggests that for a heavily indebted, slow-growing, ageing economy, fiscal virtue may buy survival and credibility without buying prosperity.

That is the uncomfortable lesson. Pleasing Brussels and the bond market are achievable goals, and Italy has achieved them, but they are not the same as making citizens better off.

The counter-case: discipline as the precondition

The strongest objection is that this has the sequence backwards, and that discipline is not the brake on growth but its precondition, with the payoff simply not arrived yet.

The case is serious. A country with Italy’s debt cannot grow sustainably while markets doubt it, because high borrowing costs choke investment and hang over every business decision.

By restoring credibility, the argument runs, Italy has lowered its borrowing costs and laid the foundation on which real growth can eventually be built. Supporters cast the past three years as a confidence restoration that will bear fruit once the foundation is secure.

There is real merit here, and Italy’s lower borrowing costs are a genuine gain. But the objection has to answer the timing: three years in, the foundation is laid, the growth has not come, and the structural weaknesses are untouched.

The fair resolution is that both are true. Discipline was probably necessary and is clearly not sufficient, and a country that mistakes the first act for the whole play may find itself credible, solvent and still going nowhere.

The Latin American test

For Latin America, Italy’s dilemma is not exotic. It is the region’s own recurring argument, dressed in European clothes.

Every heavily indebted economy from Buenos Aires to Brasília has faced the same choice: tighten the budget to win back markets, or spend to chase growth and risk losing their trust. The region has tried both, and knows the cost of each.

Argentina in particular is living a sharper version of the same experiment right now, imposing severe discipline in the hope that credibility will translate into growth. Italy’s slower version is a preview of the question hanging over that bet.

The lesson is sobering and universal. Discipline can restore a country’s standing without restoring its prosperity, and the hardest part of fiscal virtue is not achieving it but making it lead somewhere.

Frequently Asked Questions

How much did Italy cut its deficit?

Italy brought its budget deficit from around eight percent of output in 2022 to just over three percent in 2025, near the European Union’s three-percent limit. Ten-year borrowing costs fell from a 2023 peak near five percent to about three and a half.

Why isn’t Italy’s economy growing despite the fiscal success?

Because the deficit fell mainly by subtraction, chiefly the winding-down of the costly Superbonus credit, which removed demand from an already weak economy. Deeper structural problems, an ageing and shrinking population and flat productivity, are untouched by budget discipline.

Why does Italy’s paradox matter beyond Italy?

Italy is the euro zone’s third-largest economy with one of the world’s largest debt burdens, so its experience is a warning. It suggests fiscal virtue can buy credibility and lower borrowing costs without delivering prosperity, a dilemma heavily indebted economies like Argentina face too.