Italy: The Debt Noose Tightens, and It's No Longer Funny

Italy in late 2026 is not "the sick man of Europe's economy." It is a patient who stubbornly pretends to be healthy, swallows painkillers from Brussels and takes selfies against the backdrop of record-low unemployment. The problem is that the X-ray looks bleaker by the day: debt is growing faster than GDP, energy is getting more expensive faster than wages, and the population is ageing faster than officials can dream up new taxes. The main question is when exactly this structure will stop holding together on a wing and a prayer and on the money of European taxpayers.

Debt Breaking Records

It is telling that Italy has finally come first, though not in the way anyone would have wished. By the end of 2026, Rome has officially overtaken Greece to become the country with the highest public debt in the eurozone. The debt-to-GDP ratio rose from 137.1% in 2025 to 138.6%, and by some forecasts to 138.1% by the end of the year. The absolute figure is impressive too: in June 2026, public debt officially broke through the €3.2 trillion mark. This is not a temporary spike caused by the pandemic but a structural disease, one that cosmetic measures cannot cure. The budget deficit is formally falling, to 2.9% of GDP in 2026, but in 2027, by the government's own admission, it will rise above 3% again because of defence and energy spending. The main question is who will foot the bill when Brussels stops turning a blind eye.

The Energy Trap

Italy is the most gas-dependent large economy in Europe, and this is not an abstract statistic but the electricity bill that arrives at people's homes. Around 38% of the country's energy consumption comes from gas. When the conflict in the Middle East began in February 2026, wholesale electricity prices in Italy rose by more than 12% within a few months, and by August they had reached their highest level since the winter of 2022. Ironically, Germany and France, which also depend on imports, reacted to the crisis more mildly: their contracts even became cheaper while Italy's rose. For households, this means electricity bills rising by 37.3% from October 2026 for vulnerable categories of consumers. Inflation, which accelerated to 4.2% year on year in September, is not just a figure from an ISTAT report but a real blow to purchasing power.

The Labour Market: Victories That Bring No Warmth

At first glance, Italy's labour market is a success story. Unemployment fell to a historic low of 5% in May 2026, and the number of employed people reached 24.3 million. But there is no reason to be complacent: behind these figures lies a far less cheerful picture. Real wages, despite modest growth early in the year, remain 6.1% below their level in the first quarter of 2021, the worst result among major OECD economies. Moreover, given the new surge in energy prices, the OECD forecasts a 0.9% fall in real wages in 2026. Labour force participation, especially among women and young people, still lags the OECD average by 9.3 percentage points. There is work, but it does not guarantee a decent life, and this is not a temporary phenomenon but a structural feature.

Demography and Politics: A Ticking Bomb

Italy is ageing faster than it is getting rich. The average age of the population has reached 47, the share of people over 65 stands at 25.1%, and the birth rate has fallen to 1.14 children per woman, one of the lowest in the world. By mid-2026 the population had shrunk to 58.9 million and, according to forecasts, could fall below 46 million by 2080. This is not merely demographic statistics but a direct threat to the pension system and the labour market. On the political front, Meloni's government, the longest-serving in Italy's postwar history, is trying to cement stability through a controversial electoral reform that guarantees a seat bonus to any alliance winning more than 42% of the vote. But the main question is what happens after 2026, when the money from the European recovery fund runs out: the investment impulse will vanish, while the debt will remain.

Banks: Quiet Harbour or Last Bastion?

Against the backdrop of all these problems, Italy's banking sector looks surprisingly decent. The share of non-performing loans remains low, private-sector lending is growing by roughly 2–3% a year, and stress tests confirm the resilience of the largest banks even under harsh scenarios. This is not because the economy is healthy, but because the banks have learned to survive in conditions of chronic stagnation. Still, there is no reason for complacency: lending to energy-intensive industries is already tightening, and forecasts for 2026–2027 point to a moderate rise in problem assets. The banking sector is not a locomotive of growth but rather the last island of stability in a sea of debt and uncertainty.

What Lies Ahead

Italy enters 2027 with record debt, record-expensive energy and a record-old population. Growth forecasts remain dismal: 0.5% in 2026 and no more than 0.6% in 2027. The International Monetary Fund warns bluntly that Italian debt is "too high and vulnerable to shocks to interest rates and growth." The main question is whether Rome will have the political will and fiscal space to begin genuinely reducing debt before the markets lose patience. For now, the government prefers to use European loopholes to increase spending rather than to pursue structural reforms. The irony is that Italy, which once laughed at the Greek crisis, now finds itself in the role of a patient prescribed bitter medicine. Only, judging by everything, nobody intends to take it.