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Role reversal
10/10/2025
How Italy and France appear to be switching positions when it comes to the respective riskiness of their government debt.
Here is one problem with political instability. The less certain their hold on power, the shorter the time horizon of a government or policymaker. Prioritizing the long-term welfare of a country as a whole is a luxury that may seem hard to afford if a government is just trying to survive, day by day, just long enough, say, to pass the next budget.
Seen against this backdrop, it is illuminating to contrast recent political turmoil in France with developments further south. Our Chart of the Week compares the fiscal trajectory for France and Italy, as outlined at the start of the year under the European Union (EU) stability programmes for both.[1] The overall patterns are striking enough, with Italy seemingly on track to see its budget deficit fall below 3 percent of gross domestic product (GDP), allowing it to exit the EU’s excessive deficit procedure.[2] For France, by contrast, looked set to suffer that iniquity until 2029. Under EU rules, deficit procedures are supposed to restrict the member states' room for maneuver on tax cuts and spending, for as long as a country exceeds the 3% deficit limit.
The real contrast, however, has been how Italy is sticking to and probably even exceeding its targets, while running a primary budget surplus. Meanwhile, France has been struggling to even pass its budgets. When it comes to austerity measures, parliament has been at an impasse ever since Emmanuel Macron dissolved the lower house last summer. France has gone through five prime ministers since Macron was re-elected president in 2022, reminiscent of the shakiness of French governments before Charles de Gaulle pushed through a new constitution in 1958.
“For this year, France appears on track to have the largest budget shortfall of all Euro area members, no matter exactly what political and parliamentary maneuvers there might be in coming days and weeks,” points out Ulrike Kastens, Senior Economist Europe at DWS. “To be sure, Italy remains more highly indebted, but the gap has been shrinking fast.” No wonder then, that for the first time since the launch of the euro in 1999, French government bonds are now consistently trading at slightly higher spreads than Italian bonds.
Compared to Italy, France was already planning to take its time in shrinking its budget deficit.
Sources: Haver Analytics Inc., EU stability programmes of Italy and France for 2025-2029, DWS Investment GmbH as of 10/8/25
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