Europe and Istat, the scapegoats for a deficit that was off by one decimal place

By 2025, Italy had failed to reduce its public deficit to below 3 per cent of GDP. It is therefore not possible to exit the excessive deficit procedure, as had been hoped.

The blame lies, first and foremost, with Europe. Secondly, with the statistics. This is the gist of the political debate that has followed the news of recent days. Nothing surprising there. It’s convenient to have a scapegoat. And, amongst the favourites of many politicians and commentators, there is always Europe.

Europe is blamed for many things. The first is that it is too rigid. Italy’s deficit in 2025 stood at 3.08 per cent of GDP, rounded up to 3.1. Given that the target was only narrowly missed, one could – indeed, one should – have turned a blind eye.

In fact, for the past thirty years, European rules on public finances have been applied equally to all countries: a deficit is considered ‘excessive’ if it exceeds 3 per cent. All government officials – starting with the German minister Theo Waigel, who in 1996 had to push through a last-minute budget at the end of the year – are well aware that ‘the important thing is that the two comes before the decimal point’. Flexibility in European budgetary rules does exist and has been applied in the past. It does not concern the 3 per cent threshold, but rather the exclusion of certain items of expenditure from the deficit calculation. However, such flexibility must be agreed in advance, not applied retrospectively once the target has already been missed.

The other criticism levelled at Europe is that it has not suspended the Stability Pact in the current crisis. Here too, the option to suspend European rules exists and has been applied in the past, for example during the pandemic. The suspension is, however, subject to specific conditions, relating in particular to the macroeconomic context, in order to prevent manipulation. Despite geopolitical tensions and rising energy prices, the European economy continues to grow. The Italian economy is growing more than expected and unemployment is at an all-time low. Under these circumstances, calling for the suspension of the Pact means losing political credibility.

Europe’s third fault is that it is preventing Italy from implementing a fiscal stimulus policy until it exits the excessive deficit procedure. Here too, a lack of understanding of European procedures prevails. First and foremost, there is no provision – nor would it be desirable – for a country to halt its consolidation process once the public deficit has fallen below the 3 per cent threshold, particularly if debt remains high. The multi-annual trajectory negotiated by Italy with the European Commission and the Council of the European Union provides for net expenditure to continue to fall as a proportion of GDP, so as to ensure a reduction in public debt of at least 1 per cent per year. This means that the primary budget balance – that is, net of interest on the debt – must continue to improve over the coming years, as set out in the economic and financial policy document presented by the government last year.

Countries with a deficit of less than 3 per cent may increase certain expenditure without this being taken into account for the purposes of the excessive deficit procedure. However, this relates to targeted expenditure, in particular military spending and expenditure on energy investments, which must in any case be financed, ultimately, through the issuance of government bonds on the financial markets.

From the markets’ perspective, what matters is not only the European procedure, but above all the trend in Italy’s public debt, which is the highest in Europe. Experience shows that when the deficit falls, as has happened in recent years, the spread between Italian and German government bonds narrows. Conversely, when the deficit is forecast to rise, as was the case in 2018 during the ‘yellow-green’ government (Conte I), the spread rises. Under these circumstances, reversing the efforts of recent years and allowing debt to rise again by 2027 would cause serious concern, as demonstrated by the rise in the spread to around 100 basis points in recent days.

In short, anyone who hoped that exiting the excessive deficit procedure would pave the way for an expansionary budget was living in a dream world.

The other scapegoat for Italy’s failure to exit the excessive deficit procedure is the National Institute of Statistics, which is to blame for having revised GDP estimates for the last ten years upwards, as a result of a methodological change adopted at European level. If a similar revision were to take place in a few years’ time – some have argued – we might discover, with the benefit of hindsight, that the public deficit relative to the new GDP series for 2025 was below 3 per cent and that Italy should have exited the excessive deficit procedure sooner than it did. This argument, however, appears to contradict the laws of mathematics, in particular the way in which the value of a fraction (such as that between debt and GDP) changes as the numerator and denominator change. As Luciano Capone has clearly explained in these pages, in order to bring the deficit-to-GDP ratio below 3 per cent, gross domestic product for 2025 would need to be revised upwards by around 6 per cent. This is a rather unrealistic assumption.

In conclusion, the reduction in the Italian deficit is good news, even if it does not yet allow the country to exit the infringement procedure. It should serve as an encouragement to do better next year, without looking for shortcuts and without blaming others.