Meloni’s helped shake Italy’s high-risk reputation, but challenges remain

Greater political stability under Prime Minister Giorgia Meloni’s government has made Italy more attractive to foreign investors, but the country’s former leaders say more needs to be done.

Two former Italian prime ministers said on CNBC on Friday that reforms were needed to revitalize the Mediterranean country’s stagnant economy.

On Friday night, Meloni’s coalition government, which took office in October 2022, held a rally in the port city of Bari to commemorate becoming Italy’s longest-serving government since World War II.

“In recent years, we have worked to increase employment, reduce unemployment, support families and businesses, strengthen security, take serious financial management and restore Italy’s weight and credibility on the international stage,” Meloni said in a translated statement on Friday.

This milestone is particularly noteworthy in a country that has seen 68 governments in power for more than 80 years and has long been associated with political instability, a problem exacerbated by the 2010-2012 eurozone debt crisis.

Paolo Gentiloni, who served as Prime Minister of Italy from December 2016 to June 2018, told CNBC’s Carolyn Ross, “In other countries frequent changes of government are becoming the norm, and in Italy stability is becoming the norm. It’s surprising.”

“At the same time,[Meloni’s record]is good for a certain amount of fiscal prudence to bring down our fiscal spreads. But that’s all there is to it, longevity is not enough for the government.”

Gentiloni said Italy was experiencing a “very good recovery” after the pandemic, but that recovery had slowed in the past two or three years.

Italy’s economy is expected to grow by 0.5% in 2025, lower than the eurozone average of 1.5%, making it one of the countries with the lowest growth rate in the eurozone. Italy’s employment rate remains strong, but the youth unemployment rate was 18.9% in July, higher than the euro zone average of 14.9%.

“Of course this is a failure,” Gentiloni said. “In the last two or three years, we’ve seen families’ (spending) power decline. This is why the government is not as happy as it seems.”

Mario Monti, Italy’s prime minister from 2011 to 2013, told CNBC that Meloni did not change course because he was a “very smart politician” and “didn’t do much.”

“She may modernize the economy by introducing more competition and competitiveness, but she has carefully avoided conflicts with sections of society that would cost her political consensus,” said Monti, now director of the Jabot Bocconi Institute.

Monti said Italy needed structural reforms, including a crackdown on tax evasion, full enforcement of competition law and a willingness to “inject more vitality” into the economy “through a little more disruptive creation”.

Meloni’s appointment as prime minister is closely watched in France and Germany, where far-right parties are enjoying increasing political success.

“It’s true that power moderates extreme positions,” Monti said, noting that Meloni’s populist, right-wing pitch to voters had proven to be more pragmatic than his populist, right-wing pitch to voters had suggested.

“That’s why no one is going to want to leave the EU or leave the euro right now. But if there is a lack of appetite for some sort of political confrontation, it certainly increases stability, but it also means a lack of growth and a degrading society. And that’s why even the youngest and brightest people in this country want to leave,” Monti said.

Enrico Letta, who led Italy’s coalition government from 2013 to 2014, said that despite political stability at home, a “not-so-good” economic performance and rocky relations with Europe had dampened sentiment towards Italy.

“Stability is a value, but what’s really important is the stability of relations between European countries. I’ve been unsatisfied this summer with all the conflicts over immigration, Schengen, etc.,” the dean of the IE School of Political Science and International Studies told CNBC.

Letta said if the EU wants to attract more international investment, European countries must prioritize cooperation on migration, trade wars, security and inflation, and finalize the EU’s long-awaited savings and investment union and single regulatory framework.

Meloni inherited an Italy that was politically divided and had financial problems.

At the time, there were concerns about the country’s budget deficit, which accounted for 7.2% of gross domestic product. When the budget deficit rose to 7.4% of GDP in 2023, Italy became subject to the European Union’s excessive deficit procedure, which sets the threshold for government deficits at 3%.

Since then, the budget deficit has declined sharply, reaching 3.1% in 2025. The European Commission expects this figure to fall to 2.9% this year as government revenues rise due to employment and wage growth.

Yields on Italian government bonds have also fallen as the budget deficit has declined, and the spread between Italian and German government bond yields has narrowed significantly since late 2022, suggesting that investors are seeking a lower risk premium to hold Italian government bonds over German government bonds. The yield gap between French and German government bonds widened significantly over the same period.

However, Rome, like many G7 countries, still faces huge debt problems. Italy’s debt-to-GDP ratio began to decline in 2024, mainly due to coronavirus-era policies giving tax credits for home renovations, according to EU data. The debt-to-GDP ratio in 2025 is expected to be 137.1% and rise to 138.5% this year.

Borrowing costs for the Italian government have been affected by a global sell-off triggered by geopolitical shocks such as the U.S.-Iran war and investor concerns about inflation, but yields are still significantly lower than before Meloni took over. Bond yields move inversely to prices.

Lauren Hyslop, an investment manager at Mattioli Woods, told CNBC in an email on Friday: “What was surprising about Giorgia Meloni’s appointment as prime minister is that she has governed primarily as a fiscal pragmatist rather than a populist.”

“The market has rewarded this approach through tighter bond spreads, higher ratings and lower borrowing costs. Italy has definitely regained investor confidence.”

“Italy used to have a political instability premium almost by default, but that has faded considerably,” agreed Ken Egan, senior director of sovereign debt at ratings agency KBRA, citing long-term governments, a more predictable fiscal path and a continued push for reform.

Egan said in an email that Italy’s medium- and long-term government bonds have held up relatively well compared to other developed countries amid the global sell-off. Italy’s 10-year bond yield has risen 62 basis points this year, but its 10-year total return, which takes into account both price movements and interest income, is the highest among European peers, he noted.

But Jason Borboracine, co-portfolio manager for revenue strategies at Ninety-One, told CNBC in a phone call Friday that while Italy has “something about the stability and continuity of political leadership,” there was also a self-fulfilling element to the turnaround in fiscal conditions.

“The more stable a country is, and the more its debt burden is alleviated to some degree, the more likely its people are to be satisfied with the incumbent government, and vice versa,” he said.

Nevertheless, Borboracine told CNBC that his team does not see a particularly compelling investment case for Italian government bonds.

“The fundamental story is very positive, but we think the market appreciates it,” he said.