"Being in or out of the infringement procedure for excessive deficit does not substantially change the spending constraints. It is above all a question of stigma and politics. The exit could be a way to possibly speed up the elections." Paolo Pizzoli, senior economist at ING, reads the comparison on public finances like this. The bank predicts a slowdown in the Italian economy: GDP could grow by 0.9% in 2026, before stopping at 0.7% in 2027.
In Italy budgetary policy marked by prudence
The assessments were presented in Milan during a meeting dedicated to the prospects of the economy and markets. For Italy the starting point is a budget policy which, explains Pizzoli, remains marked by prudence even in an election year. A choice that reflects the awareness of the risks linked to debt, which have returned to the foreground with the increase in yields and the tensions on the markets that are affecting France.
Public accounts and electoral calendar
“In light of what is happening on the markets in France, the government has drawn up a plan based on prudence,” observes the economist. The hope, he adds, is that "the ongoing dialogue with the EU Commission could lead to a surprise in terms of exit from the excessive deficit procedure" during 2027. An outcome which, in his analysis, would also depend on the confirmation of a deficit below 3% of GDP in the 2026 data and on the dialogue with Brussels on the use of flexibility for defense and energy.
The use of these spending margins makes the picture more complex. But the two possibilities - exiting the procedure or remaining in it using part of the flexibility - are not, for the economist, so distant in terms of the resources actually available. Above all, overcoming the stigma associated with European surveillance would make the difference. A result that the government could valorise politically and which, in the hypothesis put forward by Pizzoli, could contribute to accelerating the election date.
Debt sustainability is decisive
The constraint of accounts remains. With modest growth and higher interest rates, reducing the debt-to-GDP ratio requires an adequate primary balance, that is, a balance between income and expenditure calculated before interest payments. “There is awareness that the increase in rates is bringing the issue of debt sustainability back to the fore,” underlines Pizzoli. Hence the government's caution: "It affects positively, given that we are in a pre-election year." The approach, he specifies, could however be modified before transmission to the European Commission.
The Italian economy is holding up, but is losing the push of the Pnrr
So far, the Italian economy has resisted the worsening international scenario better than Ing expected. According to ING's analysis, the conflict between the United States and Iran and the almost complete blockade of the transit of oil, liquefied natural gas and refined products through the Strait of Hormuz have fueled new pressure on energy prices. However, consumption and investments continued to support activity, with an increase in GDP of 0.2% in the second quarter.
The labor market and investments linked to the final phase of the Pnrr contributed to the stability. The most recent indicators suggest possible resistance also in the third quarter, but the transition between the end of 2026 and the beginning of 2027 appears more uncertain. The risk is that the continuation of oil and gas price increases will add to a new increase in ECB rates. Furthermore, next year some of the PNRR's impulse will disappear. These are the factors underlying the forecast of growth at 0.7%, in a context in which the budget law will also have to deal with growing interest expenditure.
Energy and rates, the risk for Europe
The Italian difficulties are part of a European context marked by the return of attention to the sustainability of public debts. For Carsten Brzeski, global head of macroeconomic analysis at ING, the increase in bond yields largely reflects the revision of market expectations after the war in the Middle East, higher energy prices and new risks for inflation.
The central banks' scenario will therefore also depend on the trend in energy prices. If they fall towards the end of the year and the increases are not significantly transmitted to the rest of the economy, in Brzeski's assessment the Fed and the ECB could be limited to just one further rate increase each.
The climate also weighs on the prospects. Heat waves, droughts and fires reduce productivity and hinder economic activity: according to the assessment presented by Brzeski, the effect on growth could reach around 0.3 percentage points in 2026 alone. For Europe, this reinforces the need to invest in adaptation, from infrastructure to buildings and healthcare facilities.
Stock markets supported by profits and investments in AI
For equity markets, however, this set of risks does not automatically translate into a negative outlook. Bob Homan, global head of investments at ING, points to earnings growth as the main support for the stock markets. The world economy continues to expand, jobs show resilience and business results exceed expectations.
In his analysis, global earnings are expected to rise 25-35% this year, with technology and artificial intelligence at the forefront. Investments by large groups such as Microsoft, Amazon, Alphabet and Meta in AI infrastructure could exceed $700 billion in 2026.
Homan urges you to evaluate bubble fears in light of the revenues, profits and liquidity generated by major companies in the sector. However, a limitation remains: with higher bond yields, it becomes more difficult to sustain further increases in equity valuations. To continue the race, the stock markets will therefore need above all company results capable of confirming expectations.
