Italy is now set to reclaim a dubious distinction: the highest debt-to-GDP ratio in the Eurozone, overtaking Greece in a financial reversal that accelerates a shift initially expected for 2028. Both the Italian Treasury and the International Monetary Fund (IMF) project the country's debt load will hit 138.4% to 138.6% of GDP this year, while Athens continues its rapid descent from crisis-era peaks to roughly 136.8%.
Why This Matters
• Historic handover: Italy becomes the most indebted nation in the Eurozone by the key debt-to-GDP metric, a symbolic blow to fiscal credibility.
• Fresh record high: In February alone, Italy's nominal debt surged past €3.14 trillion, a post-war peak that underscores the country's structural financing challenges.
• Diverging trajectories: While Greece, Spain, and Portugal have slashed debt ratios since 2020, Italy remains the only Southern European economy where the figure is still climbing.
• IMF warning: The Fund labels Italy's growth "unsatisfactory" and debt "very high," urging spending rationalization and full deployment of National Recovery and Resilience Plan (NRRP) funds.
The Snowball Effect
At the heart of Italy's predicament is what economists call the "snowball effect": when the average interest rate on outstanding debt exceeds nominal GDP growth, the debt ratio expands automatically—even if the government runs a balanced primary budget. With sluggish economic expansion hovering around 0.5% to 0.6% in real terms and interest charges estimated at approximately €90 billion annually according to government fiscal documents, the math works against Rome. Every euro borrowed to service old obligations feeds the cycle, and the denominator—GDP—grows too slowly to offset the numerator.
The Ministry of Economy and Finance acknowledges in its latest Public Finance Document (DFP) that the debt ratio will inch up to 138.6% in 2026 from 137.1% in 2025, then ease marginally to 138.5% in 2027. The IMF's projections are nearly identical: 138.4% this year and 138.8% next. Both sets of figures confirm that Italy is moving in the opposite direction to its Mediterranean neighbors.
Greece's Fiscal Marathon
Greece's turnaround is one of the most dramatic fiscal adjustments in modern European history. In 2020, Athens recorded a debt ratio of 210% of GDP—the legacy of a sovereign debt crisis, three international bailouts, and a decade of austerity. Since then, the Greek Public Debt Management Agency (PDMA) has orchestrated a relentless push: between 2020 and 2025, the primary balance improved by 12 percentage points, swinging from a deficit exceeding 7% of GDP to a surplus of roughly 5%.
Post-pandemic growth supercharged the consolidation. From 2021 through 2025, Greece posted an average real GDP expansion of 7.7%, propelled by booming tourism, robust domestic demand, and significant investment flows tied to the EU's Next Generation EU (NGEU) program. Athens has also moved aggressively to retire expensive legacy loans, including €7 billion in early repayments to the IMF and first-generation bailout creditors due in 2026. Improved tax collection and disciplined spending have allowed the government to sustain large primary surpluses—4.7% in 2024 and an estimated 3.8% in 2026—giving Athens the fiscal space to cut debt and even fund targeted tax breaks for families, pensioners, and young workers.
Italy's Structural Headwinds
Italy's rising debt reflects a cocktail of policy choices and structural weaknesses. Chief among them is the Superbonus 110%, a tax-credit scheme for home renovations that has emerged as a fiscal challenge. Originally designed to spur construction activity and energy efficiency upgrades, the program allowed homeowners and contractors to claim 110% of renovation costs as tax credits. According to the DFP, these credits are adding an estimated €40 billion to the debt in 2026 and another €20 billion in 2027. Because the credits do not generate equivalent new economic output, they inflate the debt stock without boosting the denominator.
Compounding the Superbonus drag is Italy's chronic growth malaise. While Greece, Spain, and Portugal have embraced labor-market reforms, digital overhauls, and aggressive efforts to combat tax evasion, Italy's reform momentum has been less consistent. The Bank of Italy and IMF both forecast real GDP growth of just 0.5% to 0.6% for 2026—barely enough to keep pace with inflation. With nominal growth anemic, even modest deficits push the debt ratio higher.
The European Central Bank (ECB) noted in its latest economic bulletin that fiscal policy across the Eurozone is set to tighten modestly in 2027 and 2028, but Italy's debt path remains on an upward slope. The ECB's analysis implicitly signals that Rome faces hard choices: either adjust spending or risk breaching the 3% deficit ceiling enshrined in the revised Stability and Growth Pact, which could trigger an Excessive Deficit Procedure and limit fiscal flexibility.
What This Means for Residents
For anyone living in Italy—whether a citizen, expat, or investor—the rising debt ratio carries concrete implications tied to current fiscal pressures:
• Public spending constraints: Sustaining a debt load above 138% of GDP while servicing €90 billion annually in interest payments reduces the resources available for education, infrastructure, and social services. Government budgets face ongoing pressure to manage competing priorities within these constraints.
• NRRP implementation: The €191.5 billion NRRP allocation from Brussels represents Italy's primary mechanism for structural change. The government's timeline for deploying these funds—focused on digitalization, green energy, and public-administration reform—is critical to improving potential growth and stabilizing the debt trajectory. Progress on key projects like rail upgrades and renewable-energy installations directly affects economic expansion.
• Superbonus phase-out effects: The phasing-out of the Superbonus tax-credit scheme is already cooling renovation activity. Contractors, suppliers, and homeowners should monitor government announcements regarding any successor programs, as the accounting impact continues through 2027.
• Tax compliance initiatives: The government and the Revenue Agency are intensifying efforts to improve tax collection. According to official estimates, tax evasion represents a significant drain on Treasury revenues, making compliance improvement a focal point of fiscal strategy.
Outlook and Policy Options
The IMF's prescription is clear: Italy must rationalize tax expenditures, improve compliance, and link fiscal consolidation to growth-friendly initiatives. Concretely, that means accelerating NRRP project execution—particularly digital infrastructure, rail upgrades, and renewable-energy installations—while simultaneously strengthening tax collection efforts.
The deficit is expected to dip below 3% in 2026—government forecasts put it at 2.9%, the IMF at 2.8%—but that modest improvement depends on continued economic resilience, stable energy prices, and no fresh external shocks. Geopolitical risks, from Middle East tensions to trade disputes, could affect economic conditions and fiscal outcomes.
Meanwhile, the Ministry of Finance must maintain investor confidence in Italian bonds while navigating fiscal constraints. With the 10-year BTP spread over German Bunds remaining sensitive to fiscal developments, Rome faces ongoing pressure to demonstrate fiscal discipline.
A Mediterranean Divergence
The Italy-Greece crossover underscores a broader divergence within Southern Europe. Portugal has reduced its debt ratio from 135% in 2020 to below 100% today. Spain has similarly tightened fiscal policy and boosted competitiveness. Greece, once the poster child for unsustainable debt, now runs primary surpluses large enough to self-finance and has regained investment-grade status from major rating agencies.
Italy, by contrast, has seen primary net spending grow 1.9% annually in 2025 and is projected to expand 1.6% in 2026, outpacing nominal GDP growth. Structural reforms—from civil-justice acceleration to public-procurement simplification—have advanced, but progress continues to lag what is needed to shift the growth trajectory decisively.
For policymakers in Rome, the comparative fiscal performance across the Mediterranean offers a reference point: sustained fiscal discipline paired with growth-oriented structural reforms can shift debt dynamics. Whether Italy pursues this path with sufficient intensity remains a key question for residents and investors monitoring the economy's trajectory.
