The dual-flexibility manoeuvre

The first sign of flexibility came in the afternoon following the extraordinary G7 meeting, which Giorgia Meloni attended via video link, and which agreed to release strategic reserves of up to 100 million barrels of oil and diesel over the next four months. This measure is designed to ease the pressure on fuel prices, just as the energy crisis threatens to complicate the Budget Bill. The decision has eased tensions in both the oil and financial markets, with the spread falling to 117 points and government bond yields to around 4.6 per cent, following an initial rise (spread at 130 and BTPs at 4.7 per cent).

The second flexibility measure, provided for under European rules, is the one the Italian government will request from Parliament by invoking the National Escape Clause (NEC): 0.6 per cent of GDP per year for 2027 and 2028, divided equally between energy and defence expenditure (28 billion in total). In reality, this is a more modest request than originally forecast: the government will not be asking for the full 1.5 percentage points of GDP as announced in August, but given the pressure on government bond yields, it has reduced the defence component by 0.3 percentage points of GDP.

The third flexibility measure, the one requested by Prime Minister Meloni in her letter to the President of the European Commission, Ursula von der Leyen, has for the time being been deferred until the forthcoming summits in Brussels. The Minister for the Economy, Giancarlo Giorgetti, who is more cautious than usual given the complicated international context, has announced that the Dpfp approved by the Council of Ministers confirms, in policy terms, the planned expenditure path agreed with Europe, whilst pointing out that the Italian proposal does not seek “further flexibility” but rather a reconsideration of the impact of inflation on nominal expenditure, which is making it difficult to meet the net expenditure targets set three years ago.

As regards the figures, the government has revised its growth forecasts upwards to 1 per cent in 2026 (+0.4), 0.8 per cent in 2027 (+0.2) and 0.9 per cent in 2028 (+0.1). Despite higher inflation and increased growth, Giorgetti confirms the deficit for 2026 at 2.9 per cent, which should bring Italy out of the infringement procedure (“but our assumption is not enough”, said the minister with bitter irony, referring to the 2025 breach of the 3 per cent threshold). Even taking into account the rise in interest expenditure, the deficit is expected to remain below 3 per cent in subsequent years as well, net of the NEC’s increased spending on energy and defence, thereby allowing Italy to exit the infringement procedure next spring (provided the figures are confirmed by ISTAT). Public debt this year will be half a percentage point lower than expected, at 138.1 per cent of GDP, but contrary to forecasts, it will also rise in 2027 to 138.4 per cent and will only begin to fall to 137.7 per cent in 2028, once the final phase of the Superbonus has run its course.

This is not the outline of an electoral manoeuvre. There is no ‘deviation’ of the magnitude requested by certain ministers in recent days. On the contrary, there is a reduction in the deviation permitted by the European safeguard clause for military expenditure. There is probably a political sensitivity regarding not spending more on defence than on the energy crisis, but there is certainly greater attention being paid to what is happening in the markets: “We are constantly and closely monitoring the trend in both inflation and interest rates,” Giorgetti clarified at a press conference.

The international situation is highly complex. The energy crisis is intertwined with a fiscal crisis in France that risks spreading – and the first signs of this are already partly visible in BTPs – to the rest of Europe. ECB President Christine Lagarde has described the French situation, with debt nearing 120 per cent and no credible path to reducing a projected deficit of over 6 per cent, as "a serious matter". Whilst noting that Europe’s financial and institutional architecture is different from the past, the ECB President cited the crises in Greece, Portugal, Ireland and Cyprus as examples of just how important it is to restore market confidence.

Spain, too – the fastest-growing economy in the eurozone – presents another source of political instability, with Pedro Sánchez’s government considering a snap election following Parliament’s rejection of the two decrees on the housing crisis.

It is also this context of political instability that must be taken into account. The Italian government has sound arguments, shared by other governments, to persuade the Commission to allow some further leeway on fiscal rules. But the most important flexibility – and the one Italy needs – is the fourth: that of the financial markets, which buy and sell Italian debt on a daily basis. Without that, everything falls apart. Winning the trust of affected voters without losing that of investors: this is the narrow margin within which Meloni and Giorgetti will have to draft the Budget Bill.