What will Italy’s next government mean for its mountain of debt?

The third largest economy in the eurozone, Italy is weighed down by €2.3 trillion of public debt. Here are five things to know about the country's debt mountain as far-right and anti-establishment leaders close in on a coalition deal following two months of political deadlock.

What will Italy's next government mean for its mountain of debt?
A ticking 'debt clock' in Rome's Termini station. Photo: Filippo Monteforte/AFP

Italy is the EU's second most indebted country

Italy's €2.3 trillion of debt is 132 percent of its gross domestic product (GDP), the highest ratio anywhere in Europe apart from Greece.

EU regulations suggest that the ratio should stay below 60 percent, but according to the Bank of Italy, since 1980 Italy's has exploded to its current rate from 54 percent.

How will it develop from here?

That depends on the policies that will be implemented by a new government.

The Oxford Economics Institute estimates that the basic income, drastic reduction of income tax and pension reform proposed by anti-establishment Five Star Movement and the nationalist, strongly eurosceptic League will cost €100 billion per year. This would lead to a rise in the country's deficit/GDP ratio, which would increase to 5.5 percent in 2019, compared to the 1.3 percent currently forecast by the institute. 

The institute believes this is unlikely, however, because of the expected reaction of the markets, the EU and Italian president Sergio Mattarella, who over the weekend underlined his ability to block laws that are unconstitutional.

The European Commission estimated at the beginning of May that Italy's public debt would amount to 130.7 percent of GDP in 2018 and 129.7 percent in 2019 if the country continues with its reforms.

A most 'Italian' debt

Erik Nielsen, chief economist of the Italian bank Unicredit, has noted that Italy's debt profile has “changed dramatically in recent years”. Half of it is now held by Italian creditors, and one third of that total by the country's
banks. Most of these domestic creditors are more stable than their foreign counterparts, who were the major holders of Italian debt in the past.

Another stable creditor, the European Central Bank (ECB), holds around 17 percent of the country's debt. Around a third of Italy's debt is still held by other foreign creditors, but this group is now much more stable than before and mainly contains institutional investors, including central banks.

Return of the 'spread'

The spread, as (almost) everyone knows in Italy, measures the difference between the country's borrowing rate with that of Germany, considered Europe's most solid and reliable economy. A spread of 100, for example, would mean that if Germany borrows at a rate of one percent, Italy would be borrowing at two percent.

On Wednesday the spread reached 151 points, a 20-point increase on the previous day that highlighted market uncertainty as to the economic measures that will be proposed by the Five Star/League alliance.

That, however, is a long way from the levels it reached at the peak of the financial crisis in November 2011, when the spread reached 575 points just before Silvio Berlusconi's government fell.


Italy's recent governments have worked on lowering the country's debt by acting on its public deficit. At the beginning of May the European Commission estimated that if nothing changes economically Italy's deficit/GDP ratio would be 1.7 percent in 2018 and 2019, big drops from 2.3 percent in 2017 and 2.5 percent in 2016.

However, M5S leader Luigi Di Maio and League head Matteo Salvini have made it clear that they feel no need to respect European commitments in the implementation of their programme.

Di Maio, however, assured that Italy would remain below three percent, in line with the threshold set by the Stability Pact, but very far from the previous commitments of the Italian government. And to achieve this, the two leaders rely primarily on the return of growth, which they believe will be the new economic direction. 

READ ALSO: M5S and League agree contract for Italy's 'government of change'

Photo: Andreas Solaro/AFP


Italian government rocked by Five Star party split

Italy’s government was plunged into turmoil on Tuesday as foreign minister Luigi Di Maio announced he was leaving his party to start a breakaway group.

Italian government rocked by Five Star party split

Di Maio said his decision to leave the Five Star Movement (M5S) – the party he once led – was due to its “ambiguity” over Italy’s support of Ukraine following Russia’s invasion.

He accused the party’s current leader, former prime minister Giuseppe Conte, of undermining the coalition government’s efforts to support Ukraine and weakening Italy’s position within the EU.

“Today’s is a difficult decision I never imagined I would have to take … but today I and lots of other colleagues and friends are leaving the Five Star Movement,” Di Maio told a press conference on Tuesday.

“We are leaving what tomorrow will no longer be the first political force in parliament.”

His announcement came after months of tensions within the party, which has lost most of the popular support that propelled it to power in 2018 and risks being wiped out in national elections due next year.

The split threatens to bring instability to Draghi’s multi-party government, formed in February 2021 after a political crisis toppled the previous coalition.

As many as 60 former Five Star lawmakers have already signed up to Di Maio’s new group, “Together for the Future”, media reports said.

Di Maio played a key role in the rise of the once anti-establishment M5S, but as Italy’s chief diplomat he has embraced Draghi’s more pro-European views.

READ ALSO: How the rebel Five Star Movement joined Italy’s establishment

Despite Italy’s long-standing political and economic ties with Russia, Draghi’s government has taken a strongly pro-NATO stance, sending weapons and cash to help Ukraine while supporting EU sanctions against Russia.

Di Maio backed the premier’s strong support for Ukraine following Russia’s invasion, including sending weapons for Kyiv to defend itself.

In this he has clashed with the head of Five Star, former premier Giuseppe Conte, who argues that Italy should focus on a diplomatic solution.

Di Maio attacked his former party without naming Conte, saying: “In these months, the main political force in parliament had the duty to support the diplomacy of the government and avoid ambiguity. But this was not the case,” he said.

Luigi Di Maio (R) applauds after Prime Minister Mario Draghi (L) addresses the Italian Senate on June 21st, 2022. Photo by Filippo MONTEFORTE / AFP

“In this historic moment, support of European and Atlanticist values cannot be a mistake,” he added.

The Five Star Movement, he said, had risked the stability of the government “just to try to regain a few percentage points, without even succeeding”.

But a majority of lawmakers – including from the Five Star Movement – backed Draghi’s approach in March and again in a Senate vote on Tuesday.

Draghi earlier on Tuesday made clear his course was set.

“Italy will continue to work with the European Union and with our G7 partners to support Ukraine, to seek peace, to overcome this crisis,” he told the Senate, with Di Maio at his side.

“This is the mandate the government has received from parliament, from you. This is the guide for our action.”

The Five Star Movement stormed to power in 2018 general elections after winning a third of the vote on an anti-establishment ticket, and stayed in office even after Draghi was parachuted in to lead Italy in February 2021.

But while it once threatened to upend the political order in Italy, defections, policy U-turns and dismal polling have left it struggling for relevance.

“Today ends the story of the Five Star Movement,” tweeted former premier Matteo Renzi, who brought down the last Conte government by withdrawing his support.