Italy's Economic Outlook: Navigating US Tariffs and EU Fund Challenges

Introduction to Italy’s Economic Landscape

Italy, a cornerstone of the Eurozone economy, has demonstrated resilience since the COVID-19 pandemic, posting modest growth of 0.7% in both 2023 and 2024. While this growth falls short of Italy’s 1% medium-term potential and the Eurozone’s 0.9% average in 2024, the country’s economic output remains nearly 5% above pre-pandemic levels. This performance compares favorably to France (+4%) and Germany (0%) but trails behind Spain (+7%), Portugal (+9%), and the United States (+12%).

However, Italy’s near-term growth prospects for 2025-26 are under pressure due to two key challenges: potential US tariffs and delays in absorbing EU recovery funds. These headwinds threaten to slow industrial output, exports, and investment. Despite these challenges, structural reforms and the continued deployment of EU funds are expected to support Italy’s medium-term growth beyond 2026. This article explores these dynamics, their implications, and Italy’s path forward.

The Threat of US Tariffs on Italy’s Economy

Italy’s Growing Trade Ties with the US

Italy’s economy is deeply integrated with global trade, and the United States has emerged as a critical export market over the past five years. In 2024, Italy exported EUR 65 billion in goods to the US, accounting for 10.4% of its total exports and 3% of its GDP. Key sectors driving these exports include pharmaceuticals, transportation equipment, automotives, machinery, and luxury goods. Additionally, Italy exported an average of EUR 10 billion in services to the US annually between 2021 and 2023 and invested EUR 5 billion in foreign direct investment (FDI) over the same period.

This robust trade relationship has resulted in a significant bilateral goods trade surplus of approximately EUR 39 billion, one of the largest among Eurozone countries, surpassed only by Germany and Ireland. However, this dependence on the US market makes Italy particularly vulnerable to disruptions, such as a potential trade war.

The Economic Impact of Tariffs

Scope Ratings estimates that a scenario involving 20% US tariffs on EU goods and 125% on Chinese goods, combined with retaliatory measures from China and potentially the EU, could reduce Italy’s real GDP growth by 0.5–1 percentage point over 2025–27. Such tariffs would disrupt industrial output, exports, and investment, creating economic uncertainty that could further dampen business and consumer confidence.

The impact of tariffs varies across sectors. For example, patented pharmaceuticals, which constitute a significant portion of Italy’s exports to the US, are less sensitive to price changes due to their specialized nature. In contrast, sectors like automotives, apparel, drinks, and food (except high-end luxury goods) are more elastic and likely to face steeper declines in demand if tariffs are imposed. Italy’s ability to mitigate these effects will depend on its capacity to diversify export markets and find alternative import sources.

Strategies to Counter Tariff Risks

To navigate the risks posed by US tariffs, Italy must explore strategies to diversify its trade partnerships. Strengthening ties with emerging markets in Asia, Latin America, and Africa could help offset potential losses in the US market. Additionally, enhancing domestic production capabilities and reducing reliance on imported inputs from China, which could face even higher tariffs, will be critical. Policymakers and businesses must work collaboratively to identify new opportunities and build resilience against global trade tensions.

Challenges in Absorbing EU Recovery Funds

The Role of EU Recovery and Resilience Funds

The EU’s Recovery and Resilience Facility (RRF) is a cornerstone of Italy’s economic strategy, with EUR 194.4 billion allocated to the country to support post-pandemic recovery and long-term growth. As of October 2024, Italy had received EUR 122.1 billion, equivalent to 63% of the total allocation. These funds are intended to finance critical investments in infrastructure, digitalization, green energy, and social programs, while also supporting structural reforms to enhance Italy’s growth potential.

However, the efficient deployment of these funds has proven challenging. By October 2024, only EUR 58.6 billion—approximately 30% of the total allocation—had been spent, according to Confindustria. The majority of expenditures have been directed toward tax credits, railway construction, and school infrastructure projects. This slower-than-expected spending has reduced the anticipated economic stimulus, with the government revising its 2021 projection of a 2.4 percentage point boost to real GDP growth for 2021–24 down to just 1 percentage point in 2024.

Delays and Their Economic Implications

The delays in fund absorption stem from bureaucratic hurdles, complex procurement processes, and capacity constraints in implementing large-scale projects. As a result, the bulk of the economic stimulus is now expected in 2025–26, with a projected cumulative impact of 2.7 percentage points of additional real GDP growth. Achieving this target would require exceptionally high expenditure of EUR 57.1 billion in 2025 and EUR 49.5 billion in 2026—an ambitious goal that may be difficult to meet given current trends.

By the end of 2024, EUR 125 billion (64% of total funds) had been allocated to contractors and service providers, leaving approximately EUR 70 billion to be committed. Scope Ratings projects that by the end of 2026, most of the EUR 194.4 billion will be allocated to projects, with implementation continuing in subsequent years. While not all funds will be spent by the end of the Next Generation EU program, most are expected to be committed to specific initiatives, ensuring long-term economic benefits.

Maximizing the Impact of EU Funds

To fully capitalize on the RRF, Italy must streamline administrative processes, enhance coordination between central and local governments, and build capacity for project execution. Prioritizing high-impact investments in digital infrastructure, renewable energy, and education will be key to boosting productivity and competitiveness. Additionally, transparent monitoring and accountability mechanisms can ensure that funds are used effectively, delivering tangible results for the Italian economy.

Structural Reforms and Medium-Term Growth

The Importance of Reforms

Beyond the immediate challenges of tariffs and fund absorption, Italy’s medium-term growth potential—estimated at around 1%—hinges on the successful implementation of structural reforms. By 2026, the government plans to introduce reforms in critical areas such as the judicial system, competition law, public administration, and procurement processes. These reforms aim to address long-standing inefficiencies, improve the business environment, and enhance Italy’s attractiveness to investors.

For instance, judicial reforms can reduce delays in legal proceedings, boosting investor confidence and supporting economic activity. Similarly, competition law reforms can foster innovation and market dynamism, while public administration improvements can enhance the efficiency of government services. These changes are critical not only for sustaining Italy’s high public debt burden, which stood at 135.3% of GDP at the end of 2024, but also for unlocking the country’s growth potential.

Balancing Debt and Growth

Italy’s high public debt remains a structural challenge, making sustained economic growth essential to maintaining fiscal stability. The RRF and associated reforms offer a unique opportunity to boost productivity and reduce the debt-to-GDP ratio over time. By prioritizing investments that drive long-term growth and implementing reforms that enhance economic efficiency, Italy can strengthen its fiscal position while fostering inclusive and sustainable development.

Conclusion: Charting Italy’s Economic Path Forward

Italy stands at a critical juncture, facing near-term headwinds from US tariffs and delays in EU fund absorption. These challenges threaten to slow growth in 2025–26, but they also underscore the importance of strategic planning and resilience. By diversifying trade partnerships, streamlining EU fund deployment, and advancing structural reforms, Italy can navigate these obstacles and unlock its medium-term growth potential.

The road ahead requires coordinated efforts from policymakers, businesses, and civil society to ensure that Italy capitalizes on its strengths—a diversified industrial base, a robust export sector, and access to substantial EU funds. With the right policies and execution, Italy can not only weather the current economic storm but also emerge stronger, paving the way for sustainable growth beyond 2026.