Italy is stronger than tariffs and better than ratings

When the pandemic broke out in 2020, no one would have ever bet that Italy would be, among the large Eurozone economies, the one capable of emerging from the crisis the fastest and with the strongest GDP growth. Instead it happened. And at the same time, Italy was also, among the large countries of the Eurozone and even of the G-7, the nation whose debt/GDP ratio increased the least, remaining almost at the same pre-Covid levels, together with Japan. A sign that the Italian recovery, even considering the super construction bonuses, was the one relatively least supported by government spending and public support, while the debt/GDP ratios of other nations, such as the United States, France, the United Kingdom and Canada, increased between 2019 and 2024 between 12 and 20 points.

Italy's post-Covid growth has instead drawn its inspiration, in addition to the construction incentives, from the structural improvements already highlighted before the pandemic, thanks to the reform of the labor market, a progressive recovery of the purchasing power of families (after the profound crises of 2009 and 2011-2014) and the Industry 4.0 Plan (which generated a strong cycle of business investments, increasing their competitiveness).

There is now no reason to think that Italy cannot face the turbulences of the new commercial protectionism desired by the President of the United States Donald Trump with equal capacity for reaction and flexibility. This has also been recognized by several rating agencies which in recent weeks have promoted Italy or confirmed their previous ratingsoutlook, although, in the writer's opinion, Italy's ratings are still too low compared to the progress and resilience that our economy has demonstrated in recent years.

Italy's post-Covid economic growth has been the strongest

Whoever looked at the economic dynamics of the four major Eurozone countries and the United Kingdom from 2019 to 2024 (figure 1), would note that the Italian GDP in 2024, compared to 2019 levels, was the second in terms of growth in real terms (+5.6%) after that of Spain (+6.9%). France and the United Kingdom are further behind (both countries with +3.6%), while Germany, hit by a long and deep depression, finds itself with almost zero growth in the five-year period 2020-2024 compared to pre-Covid levels (+0.3%).

If, however, we exclude the increase in government spending that occurred during the period, an increase which in some countries was particularly strong, we obtain a more realistic picture of the recent dynamics of the various economies. Spain's strong growth, without the push of government spending, is significantly reduced (+3.4%) and slips to second place, overtaken by that of Italy (+4.6%). The increases in the GDPs of France (+1.7%) and the United Kingdom (+1.2%) were more than halved. While Germany's growth even goes into clearly negative territory (-2.2%).

But that's not all. In fact, from 2019 to 2024, in five years, the population decreased in Italy by 762 thousand inhabitants, while, for example, it increased by 1.6 million in Germany, 1.7 million in Spain and 1.1 million in France. In all these countries, including the United Kingdom, migration phenomena have had a strong impact.

That said, it appears clear that, unlike other economies, Italy has not been able to benefit from a growth in the number of its consumers and the consequent impact on the increase in its consumption, whose weight in the GDP, as is known, is close to 60%. Nonetheless, the Italian GDP, as we have seen, grew the most net of the increase in government expenditure. If we also exclude the demographic effect, the gap between the dynamics of the Italian economy and that of the other four major European countries becomes even more accentuated and appears almost embarrassing. In fact, Italian GDP per capita excluding the increase in government spending increased by 5.9%. On the other hand, the economic growth of France drops to zero (0%), that of Spain becomes negative (-0.5%) and that of the United Kingdom (-2.6%) and Germany (-4.1%) sinks.

The post-Covid period, in conclusion, marks a turning point in the European economies. Italy's growth, net of the demographic component and government consumption, is not only no longer the last, overturning the old stereotype of the "ladder", but it even digs a deep furrow compared to other economies, which, without growth in population and public spending, instead appear to be at a standstill or in sharp decline for a five-year period.

The long investment cycle has changed the face of the Italian economy

In a nation in demographic decline, private consumption struggles to grow and contribute significantly to the increase in GDP. One possible economic policy is to increase government spending. This can be done by hiring public personnel, increasing the wage bill and therefore the spending possibilities; or by making cash or in-kind transfers to families to support incomes and stimulate private consumption; or with a mix of both of these measures. However, this approach may prove ineffective and lead to an increase in public debt that is not sufficiently compensated by adequate GDP growth. So the final consequence may be that there is a sharp increase in the public debt/GDP ratio. This is what happened after Covid to countries like France, the United States or the United Kingdom, which mainly focused on income support to get out of the crisis.

To overcome the economic crisis of the pandemic, Italy has adopted a different strategy. It has focused on investments, through strong construction incentives, the so-called super bonuses, and by maintaining business investment incentives in place until 2023.

Despite having been poorly calibrated and not having been limited by a roof, also generating waste and illegal phenomena, the construction super bonuses have generated in Italy an additional economic shock to that of business investments, with also notable employment effects, not only directly in the construction sector but also indirectly in the sector of technical and scientific professions (architects, surveyors, carpenters, blacksmiths, etc.). Furthermore, the demand for construction goods has stimulated numerous important productions of Italian manufacturing (metal products, electrical materials, taps and valves, cement, ceramics, stones, tiles, paints, fixtures, furniture, etc.), with notable induced effects. Lastly, the construction boom and the economic boom connected to the first, combined with the increase in employment, have also significantly increased state revenues, making the impact of tax incentives less burdensome for the state.

In essence, Italian GDP recovered quickly, after the fall in 2020, and grew at high rates in 2021 and 2022, also driven by the good performance of other components of demand (consumption, exports, investments in machinery). This also led to a rapid decline in the debt/GDP ratio, which had risen to a maximum of 154.4% in 2020. This ratio immediately fell to 145.8% in 2021 and 138.3% in 2022. It subsequently fell further to 134.6% in 2023. A decrease of almost 20 points in three years that would never have happened without the positive shock triggered by the superbonus. The latter, being financed with deferred tax credits, transferred their impact on public accounts immediately to the deficit (that of 2023 reached 7.7% of GDP), while, at the debt level, they did so in the form of capital transfers to families spread over several years, through the stock-flow adjustment mechanism. Despite the size of the fiscal incentives for restructuring, the impact on public debt has so far been rather limited. In 2024, the GDP debt rose to 135.3%, a growth of just 0.7 points compared to the previous year. The Italian government's 2025 DFP predicts that, mainly due to the deferred effects of super bonuses, Italy's debt/GDP will rise to 137.6% in 2026 and then start to fall again. Therefore, the legacy on the debt/GDP left by the superbonuses, without prejudice to the fact that it is obvious that these superbonuses could have been done better and with less financial commitment, will all in all be manageable (also considering the legacy of the additional interest on the debt that the superbonuses will leave in the coming years).

In fact, it is the first time in the new century that Italy has emerged from a major crisis (that of Covid) with practically the same debt/GDP ratio as it entered it: 133.9% in 2019; 134.6% in 2023. And it was also the only G-7 country to achieve this. Unfortunately, this had not happened in the two previous major crises: the global financial collapse of 2008-2009 and the Greek debt contagion of 2010-2011 with the subsequent austerity until 2014. On those two occasions (from 2007 to 2011 and then from 2011 to 2014) the Italian debt/GDP increased both times by more than 15 points, a total of 31.3 points. The same happened more or less in France (+30.6 points), while in Spain the debt/GDP grew by as much as double from 2007 to 2014 (+68.7 points). Those two crises imported from the world and from Europe nullified years of worthy primary state surpluses which had previously made it possible to reduce the Italian debt which exploded with the First Republic. This time, however, Italy emerged from the great crisis of the pandemic without a worsening of the public finances. Even if the debt/GDP temporarily rises to 137.6% in 2026 due to the aftermath of stock-flow adjustments linked to building incentives, it will not be a drama.

Ultimately, in summary, the Italian economy has recovered from Covid with a substantial injection of investments (not only in private construction but also in business technologies and public works), with an employment boom that has increased incomes and state revenues and with the third strongest GDP growth among the G-7 countries, significantly distancing France, Japan, the United Kingdom and Germany. Italian GDP per capita has even increased at record rates, as we have already seen previously. Debt/GDP was kept relatively under control.

Indeed, by comparing the economic dynamics that occurred from 2019 to 2024 with the change in the debt/GDP ratio in the same period, it can be said that Italy was the economy that achieved more real growth with less debt (figure 2). In fact, considering the latest estimates from the International Monetary Fund ("World Economic Outlook", April 2025, which differ slightly from the Eurostat and OECD ones mentioned above regarding the assumptions on the population of the various countries), we can note that Italy's GDP growth per inhabitant was 7.1% between 2020 and 2024 compared to 2019, second only to that of the United States (+8.7%) but causing much less public debt (+1.5 points of debt/GDP against 12.6% in the USA). Other economies have also taken on much more debt than Italy with modest (France), zero (United Kingdom) or even negative (Canada) GDP per capita growth results. This is because Italy, to emerge from the pandemic, has favored a type of growth more based on investments and their positive effects, while other economies have generally focused more on an increase in public spending to support families in difficulty.

But the boom in investments in residential construction in Italy from 2021 to 2023 was not the only important investment cycle that occurred in the last ten years in our country. In fact, it was also preceded by a long period of expansion in investments in machinery, plants and means of transport stimulated by the tax incentives of the Industry 4.0 Plan launched by the Renzi government and then continued with other names and variants until 2023 (see figure 3). The Industry 4.0 Plan can be considered perhaps the most important industrial policy implemented in Italy in recent decades. The boom in technical investments by companies that it has favored has made the Italian economy more efficient, robotic and competitive. This boom was briefly interrupted in 2019-2020 with the temporary suspension by the Conte 1 Government of the Industry 4.0 Plan (but immediately reintroduced) and during Covid, and then started again in 2021-2023.

We are now witnessing a third important expansionary cycle of investments, that in non-residential construction and public works supported by the PNRR with resources in the Next Generation EU. In 2023-2024, in fact, these investments grew considerably.

A wise economic policy would require from now on to plan new public support for business investments (also given the failure of the 5.0 transition) which could trigger a new cycle of private investments in an ideal "relay" when that of the PNRR-related works runs out. The investment path, in fact, is obligatory for a nation like Italy in which family consumption, as mentioned, can only grow at modest rates due to demographic decline.

Italy need not fear Trump's trade war

If the trade war that Trump has unleashed with China already appears unrealistic and harmful to America's jewel companies, such as Apple, the war with Europe is absolute nonsense.

Years of relocation to Asia and Mexico of the production activities of US companies, inspired by liberal thought (both Republican and Democratic in nature) and by the search for profits thanks to low labor costs in emerging countries, have increasingly strengthened a dozen powerful and very rich global high-tech and online commerce giants. But many Americans, in the meantime, have become poorer. Trump is cajoling this resigned and frustrated America by promising it will be rich again with tariffs. But that America will never be able to return to what it once was, while higher tariffs risk destroying the so-called value chains that great American capitalism has created by searching for low-cost labor in Mexico and Asia. And to damage Big Tech itself, the only true success of America today, weighed down by the largest public debt in the world and torn by inequalities.

What does Europe have to do with all this? Nothing. American companies that have opened production sites in Europe have certainly not done so to seek lower labor costs than in the United States but to acquire innovative European companies and strengthen technological partnerships. The European Union, it is true, has a balance of payments surplus in goods with the United States but has a deficit in services. And the European surplus in goods essentially originates from exports of products that Americans love but that America does not produce: German and Italian luxury cars, Italian yachts and industrial machinery, Italian and French fine wines, Parmesan and Parma Ham. It will not be by applying tariffs to these European products that Trump will bring back to America the jobs lost due to production relocations to Asia and Mexico and the "Chineseization" of large American commercial chains such as Walmart which, although it now also imports from India, obtains its supplies in thousands of containers per year, 60% of which comes from China.

Europe must make Trump understand the true numbers of the United States' payments deficit with the rest of the world and we hope that Prime Minister Meloni in her trip to Washington has begun to make him understand. It is a difficult undertaking because Trump appears driven by blind tariff fury and also seems ill-advised by the disorganized circle of his ministers and economic advisors.

Let's analyze, then, the true numbers of the US trade catastrophe heralded by Trump. If we consider American trade from the import side of the United States, Europe in 2025 recorded, yes, a surplus in goods with the USA of 236 billion dollars but also a deficit in services of 76 billion. So if we consider the deficit for goods and services of the USA with the EU overall, it drops to 161 billion, a figure far lower than the deficit for goods and services that America has with China (-234 billion) or with the single Mexico (-179 billion) or with the Asian trio Vietnam-Malaysia-India (-191 billion) or with the other Asian trio Japan-South Korea-Taiwan (-192 billion).

In conclusion, the American crisis was not caused by Europe and even less by Italy. Trump is wrong to consider us "looters" of his country which, in reality, has "looted" itself by deindustrializing and "walmartizing". And in any case it will not be with tariffs that the US president will bring the cattle that have escaped to China, Vietnam and Mexico back into the stable of the American economy.

Trump has taken a very dangerous path for America and the entire world economy, which could enter into recession. And with his tariff poker, made up of bluffs, braggadocio and arrogance, he risks putting the dollar itself into crisis and the enormous public debt of the United States, which is also partly owned by the Chinese "enemies".

Despite the continuous threats of new tariffs by the US administration, for now, postponements and second thoughts prevail. Maybe, in the end, all of thisescalationit will only turn out to have been "so much thunder it rained". Perhaps, after having exaggerated and causing a crisis for his own economy, Trump is now just looking for a way to let some time pass and then reverse it without losing face. No one can currently predict how it will end.

But if, after all thestop and go, should the world trade war really break out, what will the consequences be for Italy?

The best answer to this question perhaps came from the S&P agency, which recently raised Italy's rating to BBB+. S&P is confident that, after the 90-day postponement of the duties applied to Europe, even a possible subsequent escalation of the trade war would not undermine the progress made in recent years in our country's net foreign credit position and in the balance sheets of Italian companies and families: "a buffer that puts Italy in a strong position and it is unlikely that this trend will be reversed even if the increase in American tariffs on European goods were to erode the surpluses in the period 2025-2028”.

In addition, S&P notes, Italy "will be able to benefit from the acceleration of investments linked to the Next Generation EU and from the effects of the fiscal stimulus package of around 20% of the GDP of Germany", our main foreign market. Germany's recovery, in other words, could counterbalance any declines in our exports to America. The Agency also observes that "the global nature of US tariffs offers Italy an advantage: if Italy's competitors have to bear similar duties, the risk of losing market share decreases. This is particularly relevant for mechanical engineering which represents almost 20% of Italian exports to the United States. Furthermore, the demand for expensive goods - such as luxury cars or premium wines - is typically less sensitive to price changes".

Naturally, a global trade war would generate damage for everyone, starting with the possible risk of triggering a global recession. But only the next few months will be able to clarify the probability that this dramatic scenario will come true.

Italy's ratings are improving but still do not sufficiently recognize our progress

The last difficult days for Italian sovereign debt ratings date back to 2022, with the fall of the Draghi government and the uncertainty linked to the upcoming political elections. In July 2022, in fact, S&P confirmed its rating at BBB level but lowered theoutlookof Italy from positive to stable, while Moody's in August also confirmed its Baa3 rating but worsened theoutlookfrom stable to negative.

From that moment, once the Meloni government took office, whose stability was recognized as a positive element by the rating agencies, the assessments on the prospects of the Italian public debt gradually improved. In November 2023 Moody's changed our outlook to stable. In October 2024 DBRS confirmed its BBB High rating bringing theoutlookstable to positive. Fitch did the same, confirming its BBB rating but raising theoutlookstable to positive.

Finally, in April this year S&P improved its rating on Italy to BBB+. A historic promotion: finally our progress has been recognized. It was about breaking a taboo and throwing away many consolidated stereotypes: the "spendthrift" Italy, the Italy full of debt, the Italy that is not growing, the "last" at the rear. Now S&P has broken that taboo and also displaced the many local "owls" and self-harmers, some of whom in recent months have even gone so far as to say that the old rating was "right".

S&P highlighted in particular the strong growth in Italy's international investment position that occurred after Covid, which went from an almost equilibrium to a surplus equal to 15% of GDP at the end of 2024. This is due to "substantial private savings and resilient exports". In fact, Italy's net foreign position has reached 335 billion euros (see figure 4), equal to 15.3% of our GDP. That is, Italy is now a large net creditor abroad, like Germany and the so-called "frugal" countries, while nations such as the United States, France or Spain are large net debtors. In absolute terms, Italy's international investment position is now the fourth in the Eurozone, after Germany, the Netherlands and Belgium. According to Eurostat, France, however, is a net debtor for 594 billion euros, Spain for 701 billion. While according to the US Bureau of Economic Analysis, the net financial position of the United States towards the world is negative for the stratospheric figure of 26.2 trillion dollars.

S&P then underlined various other elements of Italy's resilience and progress: the debt/GDP relatively under control, the primary state surplus achieved in 2024 (the only G-7 nation to have achieved this), the significant improvements in the labor market.

The recent confirmations of their ratings by Fitch and DBRS are also a signal that Italy is increasingly seen not only by the financial markets (as demonstrated by the decreasing spread) but also by the rating agencies themselves as a stable country, with solid economic foundations and good prospects.

However, in the opinion of the writer, our progress has not yet been adequately rewarded by the rating agencies and their assessments of Italy should reasonably be raised a little more, especially when compared with the very generous ones still attributed to economies with clearly worsening public finances, such as France. In the immediate future, the hope is that Moody's will soon follow S&P, improving its stingy Baa3 rating to at least a Baa2.