MediumIV Macro Policy & Sovereign Debt1 October 2026, Thursday
Meloni asks the EU for new budget flexibility over inflation shock
Italian Prime Minister Meloni wrote to von der Leyen after annual inflation rose to 4.2% in September. The letter says spending directly hit by inflation equals 20.4% of GDP and seeks extra flexibility at the 8–9 October Eurogroup and Ecofin meetings.
Il Sole 24 Ore reported on 1 October that Meloni's letter puts Italian spending directly affected by inflation at 20.4% of GDP. Items that will be affected from 2027 onwards amount to a further 12.0%. The letter asks for permission to use the temporary indirect tax revenue generated by inflation to ease energy costs. According to the report, the oil price has risen by 80% since the start of the year and the natural gas price by 156%. The paper noted that euro area inflation has climbed from 1.7% at the start of the year to 3.2% in the latest reading.
ANSA reported on 1 October that European Commission spokesperson Paula Pinho said extra flexibility had already been given to member states. She added that the letter had not yet arrived. According to ANSA, member states can use an escape clause allowing a deficit of up to 1.5% of GDP over 3 years for defence investment. Through the national escape clause, Italy will use an additional deficit allowance of 0.3% of GDP a year in 2027 and 2028, or 14 billion euros in total. The issue will be discussed at the Eurogroup and Ecofin meetings in Luxembourg on 8–9 October and at the European Council in mid-October.
Talay assessment
Bottom line
The energy shock is putting the EU's fiscal rules back on the negotiating table. Italy wants the burden that 4.2% inflation places on its budget to be exempted from the expenditure rule. In its first response, the Commission said flexibility had already been granted. The most likely outcome is a limited compromise that leaves the rules unchanged but widens how they are interpreted.
Likely effects
- EU fiscal rulesUncertain1–6 months
If other members join the same request, pressure will build for the net expenditure path rule to be applied loosely during the energy shock.
- Euro area bondsNegativeWeeks
Extra spending flexibility could add pressure to Italian and French bond spreads on expectations of higher debt supply.
- TürkiyePositive1–6 months
If EU support that lowers energy costs sustains industrial demand, the risk of contraction in Türkiye's largest export market declines.
Possibilities, ranked
- 1Limited compromise55%
The Commission does not change the rule but counts inflation as a relevant factor when assessing draft budgets.
Watch: The conclusions of the 8–9 October Eurogroup and Ecofin meetings
- 2Rejection and tension30%
The Commission insists the existing flexibility is sufficient, and Italy takes its request to the European Council.
Watch: The agenda of the mid-October European Council summit
- 3General escape clause15%
Once several members join, the EU activates a clause that temporarily suspends the rules because of the energy shock.
Watch: Formal support for the request from Germany and France
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
- Italy inflation (Sept, y/y)▼ 4.2%
- Spending hit by inflation▼ 20.4% of GDP
- Italy extra deficit (2027–28)▼ €14 billion
- Oil price (year to date)▼ +80%