Will the Iran conflict end Meloni's long Italian honeymoon?

By Stefano Bernabei

ROME, March 19 (Reuters) - Italy has enjoyed unusual government stability since Prime Minister Giorgia Meloni took office more than three years ago, with a prudent fiscal policy and moderate international stance finding favour with financial markets and voters.

But the fallout from the U.S.-Israeli strikes on Iran launched on February 28 is exposing a series of vulnerabilities in the Italian economy that analysts say risk undermining Meloni's standing among businesses and the electorate.

The yield gap between Italian benchmark BTP bonds and equivalent German Bunds - a key gauge of investor confidence in Italy - fell early this year to below 60 basis points, its lowest since 2008.

This so-called "spread" has widened by more than 20 bps in the last two weeks. In the same period international oil and gas prices have surged, hitting the pockets of firms and families in a country whose energy needs are strongly dependent on imports.

The following five charts highlight growing headaches for Meloni:

1/ HIGHER OIL, HIGHER BTP YIELDS

This chart pulls together three variables: oil prices, 10‑year BTP yield and the BTP‑Bund spread. Italy, with its huge public debt, tends to suffer more than other euro zone countries when the markets switch to risk-off mode at times of global instability, or when markets fear higher interest rates.

The rise in Italy's borrowing costs comes as the government failed to lower the budget deficit to 3% of national output as targeted last year, leaving Rome in an EU disciplinary procedure that limits Meloni's freedom to spend ahead of a 2027 election.

2/ SURGE IN GAS PRICES PUSH UP ELECTRICITY BILLS

Italy's power system, unlike those of peers such as France and Spain, relies heavily on gas-fired generation, meaning any spike in gas prices is rapidly transmitted to electricity bills for businesses and households.

That's a big problem for a government that built part of its credibility in Italy on having tamed the domestic energy crisis triggered by Russia's invasion of Ukraine in 2022.

3/ MANUFACTURING DOLDRUMS COULD DEEPEN

Italy's manufacturing sector has been struggling for the last three years, dragging down the growth performance of the euro zone's third-largest economy.

Nonetheless, industrial groups — a core Meloni constituency, especially in northern regions — have so far backed the government. If energy costs and geopolitical risks remain high and foreign demand weakens, will they continue to do so?

4/ AGRICULTURE FACES FERTILISER SQUEEZE

The collapse in traffic through the Strait of Hormuz and supply chain disruptions running through Gulf states are also hurting Italian agriculture - critically dependent on imported fertiliser - and threatening the country's celebrated agri‑food industry.

The fertiliser shortage is "already critical (and) risks worsening with supply interruptions and further price increases," Italy's main farm lobby Coldiretti, closely aligned with Meloni, warned this month.

The price of nitrogen-based urea, among the world's most widely used fertilisers, has surged since the attack on Iran.

Italian agri-exports are also suffering. Coldiretti estimates already-incurred losses of more than 100 million euros ($114.69 million) for the floriculture sector in the southern region of Sicily alone, with over 2,000 containers of plants and flowers bound for Gulf markets stuck in transit.

5/ TOURISM

With the Middle-East conflict upending air travel to and from the region, Italian tourism bodies are sounding the alarm.

More than half a million mostly big-spending travellers arrived in Italy last year from Gulf countries — Saudi Arabia, the UAE, Kuwait, Oman, Bahrain and Qatar — up 18.3% from 2024, according to data from Italian tourism agency ENIT.

A report last year by payments firm Nexi on tourist spending in Italy showed that travellers from the Arabian Peninsula doubled in 2024 compared with 2022 and spent nearly 1,000 euros per credit card - more than twice the foreign-visitor average.

A drop‑off in wealthy Gulf visitors could be partly offset by arrivals from other regions, but Italy's travel agencies association Fiavet estimated on March 11 that losses already amounted to 38,800 euros per agency.

Total revenue losses for the sector — limited to missed bookings for Easter and spring holidays — exceed 222 million euros, it said, with only 17% of travellers having accepted alternative destinations.

($1 = 0.8719 euros)