Bank of Italy Governor Panetta Warns Gulf Conflict Could Stagnate Italian Economy, Urges EU Reform and Youth Investment

A Fragile Global Picture

Bank of Italy Governor Fabio Panetta, presenting his final considerations at the institute's annual assembly in Rome, painted a grim picture of the global economy. He stated that the situation has been "dramatically modified" by the conflict in the Persian Gulf, with the blockade of the Strait of Hormuz—through which a fifth of the world's oil and liquefied gas supplies normally transit—causing supply shortages and sharp increases in energy raw material prices.

The blockade of the Strait of Hormuz, through which a fifth of the world's oil and liquefied gas supplies normally transit, has caused supply shortages and sharp increases in energy raw material prices, from oil to gas.

Panetta warned that the overall picture remains fragile, and with large public debts and growing vulnerabilities in non-bank intermediation, even limited shocks can generate cascading effects. He noted it is difficult to establish how long hostilities will last, but transport and insurance costs for navigation in the Strait of Hormuz will remain high for a long time, keeping uncertainty elevated and hindering planning for families and businesses.

Italy's Economic Slowdown

Focusing on Italy, Panetta acknowledged the economy's significant resilience since 2019 but stressed that momentum has recently weakened. He attributed this to the deterioration of the geopolitical framework, the tightening of US trade policies, and difficulties in the German economy—Italy's main export market. Domestic demand was also curbed by the modest dynamics of disposable income, impacted by the loss of purchasing power of wages. In 2025, GDP increased by 0.5%, less than the euro area average.

According to projections, economic activity will remain weak in the coming months; in the most unfavorable scenarios, it could stagnate or contract.

Panetta called for a decisive increase in productivity, warning that without it the Italian economy could remain anchored to structurally modest growth rates. He urged the country to focus on growth, income, and prosperity in the years to come, and to steadily reduce the weight of public debt to free up resources for social spending and development.

European Reform and Monetary Policy

Panetta stressed that Europe has finally begun to react to profound global transformations but must now show speed of action. He criticized the slow path of reform, noting that international instability leaves no room for hesitation or partial responses. The effectiveness of reforms, he said, depends on the ability to overcome obstacles that too often slow their implementation: long negotiations, downward compromises, uneven national applications, and resources announced but not mobilized.

The priorities have been identified; the task now is to transform them into timely decisions, adequate financing, and concrete results. It is on this capacity for execution that the credibility of European action is measured.

On monetary policy, Panetta indicated that the economic situation in the euro area—with the energy shock already pushing up consumer price dynamics—could require a recalibration of the monetary policy stance to counter the risk of tensions. In the most unfavorable scenarios, a prolongation of the conflict and further damage to Gulf energy infrastructure could subtract a total of 1 percentage point from growth in the 2026-27 biennium in Europe, with inflation potentially peaking above 6%.

Criticism of Superpowers and Protectionism

Panetta emerged as one of the G7 decision-makers most determined to warn against the economic and financial fallout of wars and protectionism. He criticized the failure of US tariffs under Donald Trump, noting that 90% of their burden fell on American consumers and businesses. He was equally critical of China's mercantilist policies, arguing that Chinese firms reacted to US tariffs by reducing prices on foreign markets and diversifying trade outlets—a strategy effective in the immediate term but fragile in the long run, as it does not resolve internal deflationary pressures and fuels new protectionist pushes.

If pursued through indiscriminate fragmentation, these objectives would end up restricting markets, increasing costs, weakening production chains, and reducing incentives for cooperation and compliance with rules. What is intended to be protected—the well-being of citizens—would be compromised.

Artificial Intelligence and Youth

Panetta highlighted artificial intelligence as a decisive challenge, noting that in this field speed of action is crucial. The EU has defined rules for the use of models and information, a strategy for sector development, and programs. He also made a passionate appeal to invest in young people, calling it the civil duty of this time. He noted that between 2020 and 2024, 100,000 young people left Italy, and spending on education is one percentage point of GDP below the European average.

Creating the conditions so that new generations can realize their aspirations and contribute to the country's progress is not only an economic responsibility: it is the civil duty of this time.

Banking Sector Prudence

Addressing the banking sector, Panetta invited banks to exercise prudence in granting loans given the context of uncertainty and difficulty deriving from the war and possible rate increases, but warned against an indiscriminate restriction of credit. He also called for public guarantees on financing, born with Covid, to be brought back to their proper function of correcting market failures, reserving public support for deserving companies with real difficulties in accessing financing.