Italy will prioritise energy-related fiscal relief over the full use of European Union flexibility for higher defence expenditure, setting out a budget strategy intended to protect households and businesses while limiting the additional pressure placed on the country’s heavily indebted public finances.
Economy Minister Giancarlo Giorgetti told the Chamber of Deputies on Wednesday that the government would request the maximum fiscal allowance available for energy security, equivalent to 0.6% of gross domestic product over the relevant period. For defence, Rome intends to seek flexibility amounting to 0.9% of GDP, substantially below the maximum potentially available under the EU framework.
“On defence, we won’t reach the maximum,” Giorgetti said, confirming that the government had chosen not to exploit the entire 1.5% defence ceiling made available through the European Commission’s national escape clause.
The two proposed components would give Italy additional fiscal room equal to about 1.5% of GDP. Giorgetti estimated the combined amount at approximately €34 billion, although he did not specify the exact annual distribution or timetable for the expenditure. The final figure will depend on the measures accepted by the European Commission, the pace of implementation and changes in nominal GDP.
The announcement gives greater precision to a strategy signalled by Prime Minister Giorgia Meloni’s governing coalition in recent weeks. Coalition leaders had agreed that the additional spending capacity obtained from Brussels should be directed primarily towards high energy costs over the next two years, reflecting concern about the impact of volatile fuel and electricity prices on consumption, industrial competitiveness and inflation.
Italy had pressed the Commission to widen an EU fiscal exemption originally designed exclusively for defence. Rome argued that energy security should be treated as a strategic European priority because dependence on imported fossil fuels exposes households, manufacturers and transport companies to geopolitical shocks that governments cannot fully control.
The Commission accepted part of that argument in its European Semester package published on 3 June. Member states may now ask to include qualifying energy-resilience measures within the existing defence-related national escape clause. The expansion does not create a separate fiscal exemption: energy spending must remain inside the overall ceiling already established for defence.
Under the Commission’s framework, eligible energy measures are subject to an annual limit of 0.3% of GDP between 2026 and 2028 and a cumulative cap of 0.6% over the same period. The investments must strengthen energy security, reduce dependence on imported fossil fuels and accelerate the transition towards more resilient domestic or European energy sources.
The distinction between energy resilience and general price support is important. The escape clause is not an unrestricted authorisation to finance permanent reductions in fuel taxes, universal electricity subsidies or other broad measures intended solely to suppress consumer prices. The Commission has repeatedly said that emergency assistance should be temporary, targeted, proportionate and fiscally sustainable.
Rome will therefore have to demonstrate that the expenditure included in its request meets the EU’s eligibility criteria. Measures involving renewable generation, electricity grids, storage, energy efficiency, electrification or infrastructure reducing fossil-fuel imports are more likely to qualify than untargeted subsidies that encourage continued consumption of petrol, diesel or natural gas.
Nevertheless, the government’s political presentation is centred on energy relief. Italy has introduced a series of interventions to contain fuel and utility costs during the latest period of international market instability. On Tuesday, the cabinet extended a reduction of 17 cents per litre in the price of diesel from 7 August through 24 August, combining lower excise duties with a reduction in value-added tax. A tax credit for road-haulage businesses was also extended.
Those immediate measures illustrate the domestic pressure behind Giorgetti’s decision. High transport and energy costs can pass rapidly through supply chains, raising prices for food, manufactured goods and services. Energy-intensive companies also face competitive disadvantages when European electricity and gas prices rise more quickly than those paid by rivals in other major economies.
The government’s preference for the full energy allowance also reflects the political difficulty of financing a sharp increase in military expenditure through additional borrowing. Giorgetti acknowledged that requesting a budget deviation for defence was an unpopular decision, even as he argued that earlier investment in strategic autonomy could have reduced Italy’s present dependence on external suppliers.
Defence spending has become a source of tension within Italy’s governing coalition. Meloni has supported stronger European and transatlantic security commitments, but members of the League, led by Deputy Prime Minister Matteo Salvini, have been more resistant to large increases in military budgets, particularly when public services, household purchasing power and industrial energy costs remain under strain.
The government must also decide how much of its planned defence expansion should be funded through the EU’s Security Action for Europe, or SAFE, lending instrument. Italy has reserved the option of applying for up to €14.9 billion in comparatively low-cost SAFE financing, but ministers have stressed that a final decision has not been taken.
SAFE loans and national escape-clause flexibility address different parts of the financing problem. Loans provide funding for eligible procurement and defence-industrial projects, while the escape clause permits temporary deviation from a country’s EU-approved net-expenditure path. Neither mechanism eliminates the debt: borrowed funds still increase Italy’s liabilities and must eventually be serviced.
That constraint is particularly significant for Italy. European Commission data show that the country’s general government debt rose from 134.7% of GDP at the end of 2024 to 137.1% at the end of 2025. Brussels projected the ratio to increase further to 138.5% in 2026 and 139.2% in 2027, partly because of the delayed cash impact of tax credits previously granted for housing renovations.
Italy’s economy is also expanding only slowly. The Commission forecast real GDP growth of 0.5% in 2026 and 0.6% in 2027. Weak growth makes it more difficult to reduce the debt ratio because government liabilities expand against a slowly growing economic base. It also increases the political incentive to support investment, industrial activity and household demand.
The fiscal position is close to a critical EU threshold. Italy recorded a general government deficit of 3.1% of GDP in 2025, just above the 3% ceiling established in the EU treaties. The country remains subject to an excessive-deficit procedure, although the Commission concluded in June that Rome had taken effective action and did not recommend additional enforcement measures at that stage.
The Commission forecast Italy’s deficit at 2.9% of GDP in both 2026 and 2027 under policies known when its spring projections were prepared. Activation of the escape clause would allow qualifying expenditure to be treated more favourably when Brussels assesses compliance with the agreed net-spending path, but it would not erase the underlying borrowing or exempt Italy from all fiscal safeguards.
Giorgetti warned parliament that using the flexibility could complicate Italy’s attempt to leave the excessive-deficit procedure. Rome hopes revised Eurostat data to be published in September will lower the reported 2025 deficit to 3% or below. Such a revision could allow an earlier exit, provided the Commission considers the improvement durable rather than temporary.
If the deficit remains above the threshold, or if the additional expenditure produces a deterioration before the procedure is closed, Italy may remain under enhanced EU monitoring for longer. The government would then have to balance its new strategic spending against the corrective fiscal path required by the Council of the EU.
This creates a sequencing problem for Rome. An early exit from the excessive-deficit procedure would give the government greater political room to present the energy and defence package as a controlled strategic investment programme. Remaining under the procedure would expose every additional spending decision to closer scrutiny and could revive concern about Italy’s capacity to stabilise its debt.
Financial-market confidence is consequently an important part of the government’s calculation. Italy regularly issues large volumes of sovereign debt, and even a modest increase in borrowing costs can materially raise the state’s interest bill. Giorgetti has generally favoured cautious deficit management, seeking to avoid measures that could cause investors to demand a higher risk premium on Italian bonds.
By stopping at 0.9% of GDP for defence, the government is signalling that the EU ceiling is an option rather than a spending target. The national escape clause permits increases of up to 1.5% of GDP compared with a reference year through 2028, but member states are not required to use the entire allowance. Actual flexibility is linked to documented increases in qualifying expenditure.
Italy’s approach differs from that of governments on Europe’s eastern flank, where proximity to Russia and the war in Ukraine has produced broader political support for rapid military expansion. Rome supports stronger European defence capabilities but faces a different combination of voter priorities, slower growth, high debt and exposure to imported energy costs.
The Italian decision may therefore become an important test case for other highly indebted EU states. Governments confronting both security demands and cost-of-living pressures may seek to divide their fiscal allowances between defence, energy infrastructure and economic protection rather than directing the full amount towards military budgets.
For the European Commission, the challenge will be to prevent the expanded clause from becoming a general-purpose exemption from the bloc’s fiscal rules. Brussels designed the energy component narrowly, limiting it to measures that improve resilience and reduce fossil-fuel dependence. The annual and cumulative caps are intended to preserve that distinction.
The Commission will also examine whether projects began after February 2026 and whether they make a measurable contribution to European energy security. Existing national expenditure cannot simply be relabelled. Italy will be expected to identify the relevant investments, their budgetary cost, implementation period and relationship to the country’s medium-term fiscal plan.
That assessment could produce differences between the amount requested by Rome and the amount ultimately recognised under the clause. Giorgetti’s €34 billion figure should therefore be understood as a potential envelope rather than an immediately available fund. Parliamentary appropriations, procurement decisions and EU approval will still be required before the resources are spent.
The composition of the energy package will be politically consequential. Direct assistance can provide rapid relief but may disappear when subsidies expire, leaving consumers exposed to the same external price movements. Structural investment takes longer to deliver benefits but can reduce import dependence, improve efficiency and lower exposure to future oil and gas shocks.
Rome is likely to combine the two approaches, using ordinary budget measures for short-term intervention while reserving the escape-clause request for investments more clearly aligned with EU rules. The government’s current diesel-price reduction demonstrates the urgency of immediate relief, while the Brussels negotiations concern a broader multi-year strategy.
Defence policy will face a parallel implementation test. A 0.9% deviation would represent substantial potential spending, but the effect on military capability will depend on procurement planning, industrial capacity, delivery schedules and cooperation with European partners. Fiscal authorisation alone cannot guarantee that equipment or infrastructure will be available quickly.
The decision also leaves open whether Italy could later revise its defence request. The EU framework remains available through 2028, and member states may seek activation if they satisfy the legal conditions. A deterioration in the European security environment, new alliance commitments or stronger domestic consensus could prompt Rome to reassess the balance.
For now, the government is presenting its plan as a compromise between three competing objectives: cushioning the economic effects of expensive energy, contributing to Europe’s defence build-up and maintaining credibility on public finances. The choice of 0.6% for energy and 0.9% for defence reflects an attempt to keep all three priorities within a single negotiated fiscal envelope.
The next decisive stages will come in September and October. Revised Eurostat deficit figures will determine whether Italy has a realistic prospect of leaving the excessive-deficit procedure early, while the European Commission is expected to assess national requests for escape-clause flexibility in the autumn.
Until those decisions are made, the government’s announcement remains a declaration of fiscal intent. It establishes that energy security will receive the full allowance secured through Italy’s negotiations with Brussels, while defence will receive a significant but deliberately limited share. The result is a budget position shaped as much by household costs and sovereign-debt constraints as by Europe’s changing security environment.
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