MNI: Italy Eyes Transition To New NATO Target-Treasury Sources

The Italian government is confident that changes in both European Commission and NATO frameworks will allow for a smoother transition towards a higher defence spending target expected to be announced after the transatlantic summit on June 24, Treasury sources told MNI.

Rome believes that a defence spending target of 5% of GDP – a figure currently circulating in policy discussions – would be “almost impossible to meet” given the country’s tight public finances. It hopes such a goal will be accompanied by a broader definition of eligible spending, including categories currently excluded from NATO’s official calculations.

Earlier this year, the Italian government announced that it would meet the 2% NATO spending target in 2025 by including costs such as military pensions and of units like the coast guard, which are not usually considered.

Finance Minister Giancarlo Giorgetti is also pushing for an extension of the European Union’s NextGenerationEU funding programme beyond 2026 to redirect unused resources towards defence spending.

“Even if he [Giorgetti] gets it, it is only a small amount and for a short period of time,” a Treasury source said.

BIG INCREASED BORROWING DIFFICULT

Any outcome requiring Italy to significantly and structurally increase its bond issuance would be difficult to accommodate, the source added. Despite closing 2024 with a lower-than-expected public deficit of 3.4% of GDP and registering its first primary surplus since the COVID pandemic, Italy continues to face challenges in reducing its debt-to-GDP ratio over the coming years.

Giorgetti has also stated that loan requests under the new EU SAFE instrument for defence spending “should be closely monitored, considering its impact on public finances." (See MNI: Demand For EU's SAFE Loans Seen Limited To CEE- Officials)

Italy hopes that a smoother transition will give the domestic defence industry time to expand and support economic growth, which in turn could help make the increased spending more sustainable, another source said.

“In countries like the U.S. and Israel this defence sector have contributed to drive higher growth than we have,” he said, adding that “if a strong enough defence sector is developed then higher NATO expenditure will be easier to be sustain.”

LONGER AUCTIONS TENSIONS

The elevated yields seen in long-term bond auctions in the U.S. and Japan could also appear in Europe, though they primarily reflect domestic factors in those countries, a Treasury source said.

“It needs to be carefully followed but it is too soon to confirm that it’s a global trend,” the source added, noting that demographics play a key role in Japan and that, although Europe’s situation is far from perfect, it is not as severe.

While it is too early to determine what the market is signalling, some of the pressure may stem more from concerns about long-term debt sustainability than from current global uncertainty, the source said.