by Jan Strupczewski

(Reuters) – Italy has exceeded its deficit targets and is entering a virtuous circle but still needs structural reforms to accelerate growth, said Alfred Kammer, director of the International Monetary Fund’s (IMF) Europe department.

Italy reduced its budget deficit to 3.4% of gross domestic product (GDP) last year, from 8.9% in 2021, and the gap is expected to narrow to 2.9% of GDP in 2026.

“What Italy has done is it has actually exceeded its targets when it comes to EU budgetary rules,” Alfred Kammer told Reuters.

“The positive aspect of these results (…) is that they allow entry into a virtuous circle because they reduce rate differentials, which lowers interest rates and stimulates private sector borrowing, private investment and growth, which generates tax revenue and thus contributes to budgetary consolidation,” he added.

The spread between Italian 10-year bonds and their German equivalents has fallen to around 80 basis points, from almost 250 basis points in mid-2022.

“Italian politicians have understood very well that it is very costly to find ourselves in a situation where people question fiscal sustainability,” said Alfred Kammer. “I think the various Italian governments have tried hard to ensure that this is not called into question.”

But Italy still has low economic growth rates – around 0.7% per year since 2023 – and its public debt-to-GDP ratio has increased slightly to around 137%, despite the reduction in the public deficit.

“It is always difficult to revive growth in these circumstances and, for Italy, this means that it must carry out its own structural reforms,” said Alfred Kammer.

Italy had the EU Recovery Fund, of which Rome was the main beneficiary, as an incentive to carry out structural reforms because the payment of European funds was linked to the achievement of reform stages and objectives, points out the IMF official.

Once the program ends in 2026, Italy should develop its own national structural reform program to continue increasing productivity and growth, he said.

“It increases tax revenue, it allows markets to relax, and that’s the situation you want to be in,” Kammer said.

(Reporting Jan Strupczewski, Mara Vîlcu for the , edited by Blandine Hénault)

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