Moody's Boosted Italy's Credit Rating, But Does Rome Really Deserve It?

For the first time in 23 years, the credit rating agency Moody's upgraded Italy's credit rating, from Baa3 to Baa2. Moody's finds that Italy has a "consistent track-record of political and policy stability which enhances the effectiveness of economic and fiscal reforms and investment implemented under the National Recovery and Resilience Plan (NRRP)." Moody's also anticipates greater growth and fiscal consolidation, as well as a gradual decline in Italy's government debt burden. This is a small but significant vote of confidence from international markets that Italy desperately needs. At the same time, Italy's economic foundations and long-running economic challenges tell a more nuanced story. This begs the question of whether Moody's upgrade is in alignment with the economic reality in Italy. 

Short-Term Positives

Before delving into my skepticism of Moody's upgrade, I do want to address some of the positives in favor of the upgrade: 

• As the International Monetary Fund (IMF) noted in its most recent Article IV Consultation with Italy, Italy's economy has remained resilient and has shown modest GDP growth and output that has surpassed pre-pandemic levels (IMF, p. 4). 
• Given the political instability of frequent elections, it is refreshing to see policy stability relative to Italy's post-WWII historical norms. 
• Labor market reforms have led to a rise in permanent contracts. The permanent contracts contributed to an increase in the employment rate to a record of 62.7 percent (IMF, p. 5). 
• Volatility in Italy's financial markets in early 2025 has largely subsided (IMF, p. 8).
• The fiscal deficit shrunk by more than half to 3.4 percent in 2024 (ibid.), and the deficit is projected to shrink further (European Commission). Italy was able to return to a primary surplus, which helps contain the growth of government debt relative to GDP, though overall debt dynamics also depend on interest payments and growth. 

Long-Term Structural Issues

I am glad that Italy is putting in effort to avoid a disaster in the short-run. At least for now, Italy's economic stability helps the rest of the Euro Area since Italy is the third largest economy in the Euro Area. However, much like I detailed in 2018 when analyzing the Italian economy, Italy still has long-term structural issues that make it difficult to justify a long-term optimistic view:

• One of Italy's main issues to date is its large debt-to-GDP ratio at around 135 percent. Aside from Greece, it remains one of the highest in the developed world (IMF). A literature review and analysis released by the Mercatus Center this past October suggests that once the debt-to-GDP ratio gets above around 80 percent, investment may become hampered, interest-rate risk could become heightened, and long-term growth could slow down. This is not to say that Italy is disadvantaged, but Italy has its work cut out for it. 
• While it is not negative, Italy's GDP growth is modest, at 0.6-0.8 percent (Istituto Nazionale di Statistica). This is far from adequate if one of the main goals is to reduce debt burden or improve the living standards for Italian citizens. 

• Weak productivity growth has resulted in subdued GDP growth, below-target inflation, and high public sector debt, all of which create challenges for public finances (IMF, p. 4). 

• Industrial production has been on the decline. In March 2025, output was 1.8 percent lower than it was the previous year (OECD). This decline in output exposes a weakness in Italy's manufacturing base.
• Much of the growth in Italy's economy depends on the Recovery and Resilience Facility (RRF) financing the NNRP program (European Commission). It is plausible that the economic growth could falter after this time-limited investment. Even worse, if the investments are not properly implemented, the debt dynamics might reassert themselves.
• There is a further drag in the declining birth rates and decline in the working-age population (IMF, p. 10-11).

Postscript

Moody's upgrade is defensible from a short-term perspective since fiscal consolidation, NRRP investment, recovery in consumer demand, and stable macroeconomic conditions lower the likelihood of an immediate crisis. However, weak growth trajectory, high debt, and structural rigidity all indicate that any optimism for the Italian economy should remain cautious at best. The upgrade reflects improved resilience as opposed to a legitimate, lasting transformation. Italy earns one, maybe two cheers, for macroeconomic stability, especially given its history. Nevertheless, Italy has quite the hill to climb if it hopes to achieve true economic strength.