Iran Conflict Escalation Threatens Meloni’s Stability as Italian Economy Braces for Impact

Italy's Prime Minister Giorgia Meloni faces a surge in BTP spreads, energy costs, and a fertilizer squeeze as the Middle East conflict exposes economic vulnerabilities.

By: AXL Media

Published: Mar 21, 2026, 9:27 AM EDT

Source: Reuters

The End of Low Spreads: Markets Turn "Risk-Off"

For years, Meloni enjoyed a narrowing "spread"—the yield gap between Italian BTP bonds and German Bunds—which dipped below 60 basis points earlier this year. However, the Middle East war has reversed this trend. In just two weeks, the spread widened by more than 20 bps. Italy’s massive public debt makes it a primary target for investors when global instability triggers a flight to safety, threatening to increase the cost of servicing Rome's debt just as EU disciplinary procedures limit the government's ability to spend.

Energy Dependence: The Gas-to-Electricity Trap

Unlike France (nuclear) or Spain (renewables), Italy remains heavily reliant on gas-fired power generation. The recent spike in international gas prices is being transmitted directly to electricity bills for Italian households and manufacturers. This energy shock undermines a core pillar of Meloni’s credibility: the claim that her administration had successfully "tamed" the energy crisis that followed the 2022 invasion of Ukraine.

Agriculture and the Fertiliser Squeeze

The collapse of traffic through the Strait of Hormuz has created a supply chain crisis for Italian farmers. Italy’s agri-food industry is critically dependent on imported nitrogen-based urea and other fertilizers.