Italy and Greece have formally requested additional fiscal flexibility from the European Commission, citing the mounting pressure of energy-driven inflation on their national budgets. In separate letters sent this week to Commission President Ursula von der Leyen, Italian Prime Minister Giorgia Meloni and Greek Prime Minister Kyriakos Mitsotakis argued for a reinterpretation of EU spending limits as they attempt to maintain fuel and energy subsidies into 2027.
The requests come as Eurozone annual inflation reached 3.8% in September 2026, up from 3.2% in August. This inflationary spike was driven largely by energy costs, which were 18.8% higher in September than they were 12 months prior. Both Rome and Athens are now challenging the technical constraints of the Stability and Growth Pact, specifically regarding how nominal spending paths are calculated against indexed inflation.
The Conflict Between VAT Revenue and Spending Caps
A central component of Prime Minister Meloni’s proposal is a mechanism to “recycle” additional tax revenues. Because higher prices for energy and consumer goods generate higher VAT receipts, the Italian government is seeking permission to use this windfall to fund household subsidies. Under current EU fiscal rules, using such revenue for increased spending could breach established ceilings.
Italy’s fiscal position remains a focal point for European markets. While Italy’s budget deficit is forecast to fall to 2.9% of GDP in 2026—the first time it would be below the 3% limit in seven years—government projections indicate it will rise back to 3.4% in 2027 due to ongoing energy support needs. Furthermore, Italy’s public debt is expected to overtake Greece’s in 2026 as the highest in the 21-nation currency bloc.
Greece has proposed a different technical workaround. Athens has requested that the Commission exclude “temporary measures,” such as its specific fuel subsidy programs, from its net spending indicator. The Greek government intends to maintain diesel subsidies at 15 cents per euro and ensure heating oil prices remain below €1.75 per liter, costs that currently threaten to exceed the limits of the National Escape Clause (NEC).
Limitations of the National Escape Clause
The NEC currently allows EU member states to spend up to 0.6% of their GDP on energy and defense between 2026 and 2028. However, both Meloni and Mitsotakis have indicated that this threshold is insufficient given the 18.8% spike in energy costs. Approximately 20.4% of Italy’s public spending is directly exposed to inflation, including indexed pensions, creating a narrowing window for discretionary spending.
Broader international efforts are underway to stabilize the energy markets that are driving these fiscal requests. On October 2, 2026, a G7 emergency meeting resulted in an agreement to release 100 million barrels of strategic oil and diesel reserves over a four-month period. While intended to ease global prices, the immediate impact on national budgets remains uncertain as EU members finalize their 2027 fiscal plans.
The debate over these fiscal rules will move to the Economic and Financial Affairs Council (Ecofin) meeting in Luxembourg on October 9, 2026. This will be followed by further discussions at the European Council on October 15-16, where heads of state are expected to address whether the “energy security” flexibility already provided by the Commission can be expanded to accommodate the specific requests from the Mediterranean’s most indebted economies.
