Media: Italy’s economic vulnerabilities exposed by Middle East war

Italy’s economic vulnerabilities are coming into sharper focus as the war in the Middle East drives up energy risks, pushes borrowing costs higher, and raises concerns over fiscal stability ahead of the 2027 elections.

Rome’s heavy reliance on imported energy has left it particularly exposed to geopolitical shocks. In March, Italy’s two-year borrowing costs surged by 75 basis points — the steepest monthly rise since 2022 — outpacing increases in France, Spain and Germany by at least 10 basis points, Reuters reports.

Although a two-week ceasefire in early April offered some relief, Italian bond yields remain elevated. At around 2.76%, they are still well above levels seen before the United States and Israel launched strikes on Iran in late February. Debt financing costs also climbed to their highest level since July 2024 at a government auction on April 10.

Investor sentiment toward Prime Minister Giorgia Meloni appears to be shifting. After enjoying a prolonged period of market confidence following her 2022 election — supported by political stability and relatively cautious fiscal policy — that “honeymoon” is now showing signs of fading.

Italy is Europe’s most gas-reliant major economy, with gas accounting for 38% of its energy supply, according to the Energy Institute. It is also the European Union’s largest importer of liquefied natural gas from the Persian Gulf, increasing its exposure to disruptions linked to the Iran conflict.

“With prospects for prolonged energy price increases, investors are very concerned about Italy's growth outlook,” said Commerzbank rate strategist Hauke Siemssen.

The bank expects Italy to enter a technical recession in the first half of the year, forecasting two consecutive quarters of declining gross domestic product.

Italian 10-year benchmark bond yields rose around 80 basis points in March following the escalation in the Iran war — significantly more than the roughly 60-basis-point increase for French bonds and 45 basis points for German equivalents. The spread between Italian and German 10-year bonds briefly widened beyond 100 basis points, its highest level in nine months.

Rising yields are increasing the cost of servicing Italy’s already large public debt, which reached 137% of GDP last year — the second highest in the euro zone after Greece. Italian bonds remain the highest yielding among the bloc’s 21 members.

Analysts warn that the Iran conflict has underscored Italy’s vulnerability to shifts in global risk sentiment, despite government claims of improved fundamentals.

“To me, BTPs are like a global risk proxy,” said Steven Major, global macro advisor at the brokerage Tradition in Dubai.

Growth prospects remain weak. According to forecasts by the Organisation for Economic Co-operation and Development, Italy is expected to expand by just 0.4% this year and 0.6% in 2027 — making it the slowest-growing economy among the G20 advanced nations.

By Sabina Mammadli