Italy has more to gain from France’s pain
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Neil Unmack
LONDON, Oct 14 (Reuters Breakingviews) -Italy has more to gain from France’s pain. Rome’s borrowing costs are converging with those of Paris, thanks to the relative stability and fiscal assurances of Giorgia Meloni’s government. To gain a longer-term edge on her neighbours, though, Meloni will need to take bolder action.
Italian and French debt, the two behemoths of the euro zone bond market, are swapping roles. The extra premium investors demand to hold French debt over equivalent German notes is rising, as investors worry about new Prime Minister Michel Barnier’s ability to tame runaway deficits. And Rome’s so-called spreads are falling. The result: the yield gap between Italian and French debt is now just over 50 basis points, down from nearly 120 basis points at the start of the year, and at levels not seen for over a decade.
Calm politics explains part of the narrowing. Meloni’s majority government has little opposition. Barnier, by contrast, may not last if the austerity programme he has announced loses support from parties including Marine Le Pen’s National Rally. The fiscal challenge facing Meloni is arguably smaller than Barnier’s, despite Italy’s high debt and low growth. That debt burden has actually been falling as post-pandemic inflation swelled the size of salaries and tax receipts.
Italy’s debt, which had rocketed to 154% of GDP in 2020, is now 136% of national output. Cutting it further will get harder as inflation falls. Still, this year Meloni should bring in more tax than she spends, before factoring in interest payments. This so-called primary surplus would only need to rise by around 0.5% of GDP to keep debt stable as a proportion of GDP over the next four years. That’s according to Breakingviews calculations that assume average GDP growth of around 1% as per Citigroup forecasts, inflation of 2%, and current borrowing costs. For France, the fiscal squeeze needed to stabilise debt is equivalent to over 2% of GDP. That’s also assuming a higher growth rate of 1.4%.
And, despite Rome’s vast debt pile of nearly 3 trillion euros, a vibrant domestic retail investor base ought to keep yields in check. UBS estimates Italians have some 100 billion euros of excess savings, some of which may flow into bonds as the European Central Bank cuts rates, and cash returns fall.
To achieve lasting improvements, though, Meloni will need to boost the country’s sclerotic growth. That will get harder as the economic tailwind from European pandemic funds passes after 2027, and as the population rapidly ages. Her government is pushing through reforms such as cutting the lengthy time taken to process court cases. But she could be bolder in, for example, boosting education and female work participation, or privatising assets. To really catch up with France, Italy cannot sit on its laurels.
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CONTEXT NEWS
The extra premium investors demand to hold 10-year Italian debt over equivalent German debt has narrowed from over 200 basis points in October 2023 to just below 130 basis points, as of Oct. 11. The so-called spread between Italy’s sovereign bonds and French debt is now just 52 basis points, the lowest level since 2010.
Graphic: Italian debt yields are falling closer to France’s https://reut.rs/3YkAkCH
Editing by Francesco Guerrera and Oliver Taslic
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