Giorgetti and the cost of waiving half of the Safe loans

Yesterday, Giancarlo Giorgetti, the chief architect at the Ministry of the Economy, whilst outlining the guidelines of the Public Finance Policy Document (DPFP) in a deserted Chamber, said that “dark clouds are gathering on the horizon” and that the government therefore intends to stay the course towards “consolidation” of the public finances in order to steer the ship safely into port. In these stormy seas, the government has secured parliamentary authorisation for a deviation of 0.6 per cent of GDP for each of the years 2027 and 2028, under the safeguard clause for energy and defence: in total, the government will be able to run a deficit of approximately 28.8 billion euros more over the next two years.

Meanwhile, Giorgetti and the leader of the Italian government, Giorgia Meloni, are engaged in negotiations in Brussels to secure greater ‘flexibility’ from the European Commission, both regarding the use of energy funds – including to ease the cost of household energy bills (and not just for investment) – and to expand the spending margins of the new Stability Pact, which have been eroded by the effects of inflation.

Also yesterday, Brussels gave the green light to Italy’s plan to join the Security Action for Europe (SAFE), the European security initiative that mobilises a total of 150 billion in loans to strengthen member states’ defence capabilities. The amount requested by the government, according to the European Commission spokesperson, “is just over 8 billion euros”: approximately 7 billion less than the 14.9 billion made available to Italy. This inexplicable decision comes at a cost in terms of interest on the debt. Especially now that the spread and government bond yields have risen. 

There are two key questions: are the interest rates on Safe bonds higher or lower than those on Italian BTPs? And does Italy need the full 14.9 billion in loans, or just half?

The answer to the first question is obvious: if the government has made the request, it means it is in its interests. After all, it is well known that European joint debt is cheaper than Italian national debt. But the government had already set this out in black and white in the April Budget Framework Document: “The [Safe] instrument offers certain financial advantages over standard sovereign issues. The loans benefit from the European Union’s high credit rating, offer very long maturities of up to 45 years, and include a 10-year grace period for the repayment of principal”. A similar assessment is expressed by the Ministry of Defence in the 2025–27 Multi-Annual Planning Document, which sets out the investment plans for the Armed Forces.

Having established that the SAFE scheme is beneficial, one must ask how much of it is actually needed. After all, there is no point in taking on 15 billion in debt if the projected expenditure is only 8. But on this point too, the government has a clear position. Again in the April Budget Framework Document, it stated that ‘SAFE loans are consistent with the defence investment expenditure path set out in current legislation’. This means that the plan originally submitted to the European Commission includes all expenditure items for programmes already covered by the current budget chapters. This interpretation was subsequently confirmed during a parliamentary hearing by Defence Minister Guido Crosetto: “The SAFE, as it has been structured, is not an additional funding instrument for military expenditure, but rather one for expenditure already provided for in the budget”. In practice, for the government, it would simply be a matter of replacing – for expenditure already planned – a more expensive source of funding such as BTPs with a more cost-effective one such as Eurobonds. This is exactly what the government has done in many cases by using PNRR loans for investments that were already planned. It is a bit like refinancing a mortgage.

In economic terms, the choice is clear: it was in the interests of the government – and of Italian taxpayers – to request the full 15 billion from the Safe fund rather than just 8. All the more so following the government’s decision yesterday to approve a deviation that increases defence spending by a further 7 billion (0.3 per cent of GDP) per year over the next two years. There is absolutely no possibility that the total available SAFE allocation could exceed what is necessary.

And yet, despite being fully aware of the financial costs involved, the government has nevertheless decided to make only partial use of the Safe mechanism. The reasons are entirely political and internal to the ruling coalition, particularly due to opposition from Matteo Salvini’s Lega, which on the one hand follows the theories of its ‘no-euro’ champions Claudio Borghi and Alberto Bagnai, and on the other is chasing after General Vannacci. In short, our helmsman Giorgetti, who wants to steer the country through the ‘storm’, is unable to chart a course even for his own party.

The result of this compromise, which prompted a call for a ‘half-Safe’, is an additional 2–3 billion in debt costs over the entire duration of the loan. All these funds could be put to far more useful and noble purposes than paying interest. The issue is particularly relevant at this time of tension on the international markets, especially regarding sovereign debt, with a gradual rise in interest rates and government bond yields. Italy, as Giorgetti himself is keen to point out, is feeling the effects of this, with the impact becoming apparent as old debt matures and has to be rolled over at higher rates.

As shown by the data published on Monday by the UPB, Italy finds itself in this unfavourable situation just as the NRRP is drawing to a close. In 2027, gross Treasury issuance to be placed on the market will amount to approximately 533 billion: 13 billion more than in 2026. This increase, against a background of borrowing requirements and bond redemptions stable at around 530 billion, is due to the withdrawal of European loans from the Recovery and Resilience Facility, amounting to 24 billion in 2026. This line of funding could have been replaced by 15 billion in European SAFE loans, which Italy will begin to repay in ten years’ time. The government has decided to request only 8 billion from Brussels, preferring to borrow the remaining 7 billion from the market at higher costs. From a financial perspective, this represents an economic loss. From a political perspective, it is unclear on what grounds Meloni and Giorgetti will go to Brussels to ask for further flexibility if they do not make use of the flexibility that Europe has already made available to them.