Weekly Update - Fiscal Adjustment in Italy: Lessons for France?

Fitch has just upgraded Italy’s debt rating, only a few days after downgrading France’s. This contrast marks a turning point in the perception of fiscal trajectories within the euro area How has Italy, long seen as one of the Union’s most fragile countries, managed to restore its public finances? And most importantly, what lessons can France—whose fiscal credibility is now being tested—draw from this?

Diverging Fiscal Paths in a Comparable Economic Context. Since the Covid crisis, France and Italy have experienced relatively similar economic dynamics. GDP growth, albeit modest, has been comparable in both countries (between 5% and 6% cumulative growth since early 2019). Yet, their fiscal trajectories have evolved in radically different ways. Italy has managed to reduce its public deficit more quickly and, above all, to improve its primary balance—that is, the budget balance excluding interest payments. The latter became positive in 2025, while France’s remains deeply negative, at nearly -4% of GDP (see chart). This development partly explains Fitch’s decision. The agency commends Italy’s deficit reduction and relative political stability, which strengthen the credibility of its fiscal commitments.

Fiscal Discipline and the European Lever. The improvement in Italy’s primary balance is based on a dual dynamic: national fiscal discipline and strategic European support. At the national level, the Italian government has adopted a resolutely prudent stance. Current expenditures have been contained, notably in the public sector and social transfers. Support measures introduced after Covid (very generous tax credits for real estate) and the energy crisis were withdrawn more quickly than elsewhere, allowing for a significant reduction in temporary spending as early as 2023. Furthermore, the government increased taxes in a targeted manner and improved the fight against tax evasion. But the true catalyst for Italy’s recovery has come from Europe. Italy is the main beneficiary of the Next Generation EU program, through its National Recovery and Resilience Plan (PNRR), with over €190 billion allocated. The IMF notably highlights that these resources have financed public investments without increasing the deficit, while supporting economic activity. Above all, disbursements are conditional on reform milestones, reinforcing the credibility of Italy’s commitments.

A Praised Path, but Persistent Vulnerabilities. While Italy’s reform efforts are undeniable, it should be noted that the European support Rome has received cannot be replicated as such in France’s case. Moreover, despite the ratings convergence, Italy still holds a lower rating than France, reflecting persistent structural vulnerabilities. The level of public debt remains one of the highest in the euro area, around 140% of GDP, compared to 110% for France. This exposure makes Italy particularly sensitive to interest rate increases, with a historically heavier debt burden. Demographics are another weakness: rapid population aging and low birth rates weigh on medium-term growth prospects and the sustainability of public finances. Finally, political risk remains: although the current government has maintained a prudent fiscal line, the implementation of reforms is still subject to internal tensions.

A Lesson in Fiscal Credibility. Italy demonstrates that a credible fiscal trajectory, even in a context of high debt, can be recognized by markets and rating agencies. This recovery is based on a combination of national discipline, targeted reforms, and exceptional European support. France, for its part, will need to regain this credibility by showing it can restore its accounts without compromising growth. The narrowing of ratings between the two countries reflects two opposite dynamics. On one side, Italy has brought its deficit and debt ratios close to their pre-Covid levels, while clarifying its fiscal path. On the other, France is moving away from this, with continued deterioration of its indicators and political instability undermining its ability to undertake credible consolidation. For a long time, rating agencies granted France a form of leniency, based on its institutional stability and its capacity to mobilize tax revenues. These advantages are now less obvious. Conversely, Italy, long penalized by its political instability, now benefits from a more nuanced view, supported by tangible results. Admittedly, Italy still faces structural weaknesses—debt level, demographics, interest burden—that call for caution. But it offers France a valuable lesson: fiscal credibility does not rely solely on fundamentals, but on the ability to chart a coherent trajectory, supported by reforms, and validated by European institutions.

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