Europe should learn from Italy

The writer is Dean of SDA Bocconi School of Management

Italy, often dismissed as Europe’s weak link in the past, has become a success story. This is shown clearly in the verdict of investors.

Its stock market has outpaced continental peers in the past five years, with the benchmark FTSE MIB climbing about 120 per cent against a 60 per cent rise for the wider European market’s FTSE Eurofirst 300 index. Bond markets tell a similar story.

In 2022, the spread on 10-year government bonds between Italy and its neighbour France was 1.8 percentage points. In 2018, it was even higher at 2.9 percentage points. But recently, the 10-year Italian yields have fallen below French ones. This is not just about a shift in views over the improving fiscal position of Italy — it is a political one. Stability and discipline have unlocked the country’s deep industrial strengths. Unless Europe draws the lesson, it will squander a generational opportunity and drift further behind the US and China.

The financial strength of Italy’s situation is improving. Public debt to GDP is expected by the IMF to stabilise at current levels at about 127 per cent for the next five years. The banking system, once a liability, has rebuilt its capital buffers and cleaned up bad loans. And, unusually for Europe today, politics in Rome has been stable enough to reassure markets. In short, predictable governance — something Italians rarely used to associate with themselves — has begun to matter.

The 2026 budget presented by Prime Minister Giorgia Meloni last month seeks to bring the deficit-to-GDP ratio to below 3 per cent, creating space for a potential credit rating upgrade. That debt level would also allow Rome to exit the EU’s excessive deficit procedures.

Expectations are also high for Italy’s planned financial markets law, now moving through the approval process. Drafted by a pool of independent experts — of which I was a member — the reform aims to simplify and clarify the framework for investing in Italy. By merging two laws with dense and technical text into a single, more accessible piece of legislation, it seeks to channel private savings towards productive investments and to foster sustainable economic growth. A less bureaucratic environment for private equity and venture capital together with a more agile governance for listed small to medium-sized enterprises are concrete tools to do that.

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At the same time, banks, insurance companies and state-owned investment vehicles are seeking to capitalise on Italy’s momentum and the impetus of financial market regulation reform by launching a series of public-private initiatives to channel Italians’ savings. Too much of these funds are passively sitting in bank accounts or too often earmarked for real estate and government bonds. The hope is to encourage investments in other asset classes, such as equities, corporate bonds, private equity and private debt. The indirect strategic fund of Cassa Depositi e Prestiti, a public–private investment platform that channels state-backed resources into the real economy, is one example.

The fundamentals of Italy’s economy were always there but often overlooked. Italy remains the world’s eighth-largest economy and the EU’s third by GDP. It is Europe’s second manufacturing powerhouse, exporting €612bn of goods in 2024 with a trade surplus of €46bn. Its industries — machinery, technology, design, automotive parts, pharmaceuticals, fashion and food — thrive in dense clusters of SMEs that deliver both flexibility and scale. Geography adds to the advantage: 40 major ports and 42 airports make Italy the EU’s natural gateway to Mediterranean and North African markets.

Add to this world-class universities and generous tax incentives to attract expatriates and international professionals. Italy offers a mix of quality of life and intellectual capital that few countries can match. In a world dominated by volatility, Italy is a harbour not just for investors, but for talent.

This reversal of fortunes is a test case for Europe. Italy shows what happens when political stability, fiscal credibility and industrial strengths are aligned. The EU should seize the moment. It must accelerate banking consolidation to create players capable of competing globally. It must channel financial capital into strategic sectors where Europe can hold its own against the US and China. And it should use the fiscal room created by lower interest rates to pursue a genuinely pro-growth tax policy. The lesson from Italy is clear — competitiveness comes from discipline, scale and openness to capital.

Letter in response to this article:
Should longtime observers of Italy expect a ‘miracolo’? / From J Paul Horne, Alexandria, VA, US