How Italy’s Reforms Could Rebalance Europe

Italy’s fiscal adjustment comes at a time of global economic turbulence – driven by rising debt levels, persistent inflation, and growing demands for more equitable and sustainable growth models. Adding to this uncertainty, the Trump administration´s announcement of a 15% tariff on EU products is further straining transatlantic economic relations. As highlighted by Karl-Heinz Paqué, economist and chairman of the Friedrich Naumann Foundation for Freedom, in his column “The Globalization of the Future,” the recent EU–U.S. agreement represents “a serious diplomatic defeat for the EU—the most serious in its trading history. The US is imposing a 15 percent tariff across the board, while the EU is not imposing any additional duties and is even reducing some tariffs on US imports”. This situation reflects the EU´s limited leverage in trade negotiations.

These external pressures are particularly troubling in light of the Eurozone´s internal vulnerabilities, making Italy’s economic trajectory of particular concern, especially for Germany, due to its potential impact on overall financial stability. In the first quarter of 2025, Italy’s economy grew by a modest 0.3%, slightly exceeding expectations. However, the government has since halved its annual growth forecast to just 0.6%.

The Domino Effect: Why Germany Monitors Italy’s Economy?

Given the size of Italy”s economy and its substantial public debt (around three trillion Euros), its financial health is intrinsically linked to the stability of the entire Eurozone.

Germany’s close attention to Italy’s economic and political developments is a matter of shared financial security. Germany is particularly focused on Italy’s commitment to reducing its public debt and adhering to EU fiscal rules. As the largest economy in the Eurozone, Germany is a significant contributor to the European Stability Mechanism (ESM)– financed by contributions from the banking sector- which could be called upon to support a country in financial distress. Italy’s high debt-to-GDP ratio means any significant economic shock could trigger a debt crisis, potentially destabilizing the entire currency union.

Furthermore, Italy’s efforts in banking sector consolidation are closely watched, as they could influence cross-border banking relationships and the overall financial stability of the EU. While broader European issues like labor mobility and integration are also concerns, Germany’s primary focus remains on Italy’s economic resilience and its commitment to liberal market principles, recognizing that these factors are crucial for the shared prosperity of the Eurozone.

Key Measures and Implications

Italy´s economy outlook points to deep-rooted structural challenges, including industrial stagnation and persistent difficulties in effectively deploying EU recovery funds- both critical obstacles to country´s long-term economic resilience. Against this backdrop, the Italian government has approved a €30 billion 2025 budget aimed at reducing the fiscal deficit to 3.3% of GDP, down from 3.8% in 2024. This is part of a broader effort to meet the EU’s fiscal target of 3% by 2026.

The plan for the deficit reduction is multifaceted, combining spending cuts, strategic privatization measures, and targeted revenue increases. Key initiatives include permanent cuts to income tax and social contribution for low-income households, with benefits extending to incomes up to €40,000, and additional tax relief for middle-income earners.

To help finance these crucial fiscal measures, the government intends to generate approximately €3.5 billion through a temporary levy on banks and insurance companies.

Italy’s Controversial New Digital Services Tax: A Deeper Look

Italy’s 2025 Budget Law introduces a new 3% Digital Services Tax (DST). While designed to ensure fairness in the digital economy, this measure alters the regulatory landscape, extending its reach beyond global tech giants to impact even small and medium-sized digital businesses.

The core of the controversy lies in the elimination of previous turnover thresholds. Under the prior framework, the DST only applied to digital companies with global revenues exceeding €750 million and at least €5.5 million in annual revenues generated within Italy. The revised law removes the latter, local revenue threshold. This means that now, any entity providing qualifying digital services in Italy- regardless of the amount of revenue generated in the country – will be subject to the 3% levy.

Critics argue that this broad application disrupts the digital market and places a disproportionate burden on smaller players.

Italy’s National Recovery and Resilience Plan

The Openpolis project has published updated data on the implementation of Italy’s National Recovery and Resilience Plan (NRRP) – the country’s major reform and investment strategy financed through EU recovery funds. Italy is set to receive over €194 billion under the plan, to be fully implemented by June 2026. However, as of December 2024, the country had spent just €58 billion, amounting to only 30% of the total allocation.

A significant challenge remains the slow deployment of these EU funds. While Italy has successfully secured a large portion of the money, the actual spending and implementation have fallen short of expectations. To unlock the full potential of the NRRP and address its high public debt, Italy must tackle key issues like bureaucratic bottlenecks and slow administrative processes. Ensuring these investments lead to tangible, growth-enhancing outcomes is crucial. Simultaneously, the Italian government is under pressure to balance fiscal consolidation with the need for economic stimulation. This makes the efficient use of EU funds more critical than ever.

Liberal Criticism of Italy’s Economic Policies

Italian liberal political parties, such as Azione and +Europa, consistently advocate for market liberalization and lower tax pressure to boost economic competitiveness. While they generally support the direction of fiscal reform, they have been highly critical of the recent economic measures implemented by the Meloni government, arguing that they are both inadequate and poorly targeted.

This discontent was underscored at Azione’s latest national convention, where party leader Carlo Calenda offered a stark assessment of the country’s economic state. He noted that “growing corporate profits have not translated into improved economic conditions for workers, and national tax regulations have proven completely ineffective in restoring balance”, leading instead to the “impoverishment of the middle class and the elimination of jobs in industry.”

This liberal critique extends beyond fiscal policy to a more fundamental issue: bureaucracy. From this perspective, bureaucratic excess is not an inevitable outcome but a political choice. As Calenda has argued, “politicians are responsible for establishing the administrative processes that govern the country and cannot use bureaucracy as an alibi for inaction”.

This viewpoint is reinforced by +Europa’s President, Matteo Kallisey, who believes that no fiscal measures will be sufficient as long as state intervention and bureaucratic burdens persist. He points out that the potential to attract investment through market liberalization is “blocked by both a large bureaucracy and a poorly functioning justice system“, and by government attempts to replace the market with state-controlled assets.

A shared concern among both German and Italian liberals is the burden of excessive bureaucracy, a tax system that discourages individual performance, and persistent political interference. German liberals, in particular, emphasize how excessive bureaucracy and regulation, a tax system that discourages performance, labour shortages, and high energy costs are undermining competitiveness – a pattern increasingly evident across European economies.

Odilia Abreu is a Senior Fellow at FNF Europe and a policy analyst specializing in migration, political diaspora, and liberal thought in Southern Europe. Her work focuses on the intersection of mobility, democratic governance, and regional integration, with particular attention to how diasporic communities influence electoral politics and policymaking across the EU. Odilia currently works as a freelance expert, advising organizations including FNF Europe in Brussels, where she provides analyses on political developments in Spain, Portugal, and Italy.