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Meloni Nears Italy’s Stability Record, But 2027 Election Could Disrupt It

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Italian Prime Minister Giorgia Meloni is set to lead Italy’s longest-lasting government since World War Two, surpassing a record previously held by Silvio Berlusconi. Her government has benefited from political stability and improved investor confidence, particularly through tighter control of Italy’s public finances.

However, analysts warn that the stability may not last beyond the 2027 parliamentary elections. While Meloni’s government has strengthened employment and reduced irregular migration, critics say it has made limited progress on deeper reforms to public administration, healthcare and education. A failed judicial reform referendum and strained relations with U.S. President Donald Trump have also weakened her political standing.

The rise of a new far-right party led by former general Roberto Vannacci is adding further uncertainty. Recent polling suggests Meloni’s conservative coalition could struggle to reach the 42% threshold linked to proposed electoral reforms, while Vannacci’s support has risen to around 8%. Analysts say Italy could once again face a fragmented parliament and unstable coalition politics after the election.

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Italy’s Population Set to Shrink by 4 Million by 2050

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Italy’s population is projected to fall by almost 4 million by 2050, raising concerns over the country’s economy and welfare system as its population continues to age. The national statistics agency ISTAT said the population could decline from 58.9 million in early 2025 to around 55 million by 2050, before falling further to 45.8 million by 2080.

Italy’s declining birth rate is a major factor behind the demographic trend. Births fell to about 355,000 in 2025, the lowest level since the country’s unification in 1861. ISTAT expects annual births to remain broadly stable until 2030 before declining to around 335,000 by 2050, while annual deaths could peak at 869,000 in 2058.

The ageing population is expected to put increasing pressure on Italy’s workforce, pensions and welfare services. The share of people aged 65 and above is projected to rise from 24.7% in 2025 to 34.5% in 2050, while the working-age population could fall from 63.4% to 55.3%. Southern Italy is expected to experience the sharpest decline, with its population forecast to fall from 19.7 million to 16.7 million by 2050.

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Iceland Votes on EU Membership Talks

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Icelanders voted on Saturday in a closely contested referendum on whether to reopen negotiations to join the European Union. The vote has divided the country, with polls showing supporters and opponents of renewed talks almost evenly matched. Key issues include the cost of living, high interest rates, national sovereignty and control over fishing waters.

Supporters argue that closer ties with the EU could strengthen Iceland’s economy, potentially ease borrowing costs and provide greater security amid geopolitical tensions. Opponents say EU membership could weaken Iceland’s independence and threaten its control over its valuable fishing industry.

A “yes” vote would only restart negotiations with Brussels, not guarantee EU membership. Iceland would hold a second referendum on any eventual accession agreement. Polling stations close at 2200 GMT, with results expected in the early hours of Sunday. Reuters reports that negotiations could begin by the end of 2026 and take 18 to 24 months.

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Europe’s Heatwaves Expose Insurance Gap as Business Losses Mount

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Europe’s increasingly frequent heatwaves are causing major financial losses for businesses, while traditional business interruption insurance often fails to cover the disruption. In Italy’s Padua, hospitality businesses have seen customers avoid outdoor dining during peak heat, with more than 80% of surveyed businesses reporting turnover declines of around 20%.

The economic impact is significant. Moody’s estimates that last summer’s European heatwaves caused around €43 billion in lost economic output, compared with only about €500 million in insured payouts. Extreme heat is also affecting worker productivity, transport, agriculture and industrial operations, while increasing cooling and operating costs.

Insurers are exploring parametric insurance as one possible solution, with payouts triggered automatically when temperatures cross predefined thresholds. However, experts say businesses will also need to adapt by investing in cooling systems, redesigning workplaces and strengthening supply chains to reduce losses from increasingly frequent extreme heat.

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Euro Zone Factory Output Hits 4½-Year High Despite Weak Demand

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Factory output across the euro zone grew at its fastest pace in nearly four and a half years in July, according to the latest S&P Global Manufacturing PMI survey. The headline manufacturing PMI rose to 51.9 from 51.4 in June, while the output index climbed to its highest level since March 2022, signalling continued expansion in the region’s manufacturing sector.

Despite the strong production figures, demand remained weak as new orders increased only slightly and export orders declined in several major economies, including France, Spain, Italy and Austria. Economists said manufacturers are relying heavily on clearing existing order backlogs rather than benefiting from fresh business, raising concerns about the sustainability of the recovery.

Manufacturers also continued to reduce jobs as they remained cautious about future demand. While input cost inflation eased and factory gate price increases slowed, supply chain disruptions linked to the Middle East conflict continued to affect the sector. Business confidence improved modestly but remained below its long-term average, reflecting ongoing uncertainty across the euro zone economy.

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Europe’s Drought-Stricken Rivers Hit Power, Transport and Businesses

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Record-low water levels in Europe’s major rivers are disrupting electricity generation, cargo transport and business operations as prolonged heatwaves and drought continue across the continent. The shrinking waterways have reduced hydropower output, affected nuclear plant cooling systems and highlighted the growing economic impact of climate change.

Countries including Serbia, Hungary, Romania and France have cut power generation due to insufficient river water for hydropower and nuclear facilities. Several nations are expected to rely more on electricity imports, while low river levels have also disrupted the transport of grain, oil and other goods along key waterways such as the Danube and Rhine.

The drought has also affected company earnings, with utilities reporting lower hydropower production and reduced profits. Businesses across Europe are facing rising operational challenges as extreme weather exposes the need for more resilient energy and transport infrastructure.

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German Inflation Rises in Key States Ahead of National Data

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Inflation increased across four major German states in July, according to preliminary figures, signalling that the country’s national inflation rate is also likely to rise. Bavaria, North Rhine-Westphalia, Baden-Wuerttemberg and Lower Saxony all reported higher inflation compared with June, reflecting continued price pressures.

The German government expects inflation to average 2.7% this year and 2.8% in 2027, citing higher energy and raw material costs linked to the conflict involving Iran. Economists surveyed by Reuters also expect Germany’s harmonised national inflation rate to climb to 2.8% in July, up from 2.4% the previous month.

The latest figures come ahead of the euro zone’s inflation data, which is also expected to show a slight increase. The European Central Bank recently kept interest rates unchanged but indicated that further monetary tightening remains possible if inflationary pressures, particularly from rising energy prices, continue.

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ECB Sees Inflation Returning to 2% Within a Year

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The European Central Bank (ECB) expects inflation in the eurozone to return to its 2% target within the next year, according to ECB Chief Economist Philip Lane. Speaking after the central bank kept interest rates unchanged, Lane described the current inflationary pressures as a “medium-sized” shock that requires a measured policy response rather than aggressive action.

Lane said the ECB will continue monitoring inflation closely, particularly the impact of rising energy prices on wages and broader consumer prices. While the central bank has not yet seen significant second-round effects, it warned that prolonged high energy costs could increase the risk of persistent inflation.

Although the ECB did not announce any immediate rate hikes, it signalled that further monetary tightening may be needed if inflation remains elevated. Financial markets are currently expecting at least two additional interest rate increases over the coming months as the ECB works to keep inflation under control.

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Poland and Hungary Tighten Foreign Worker Rules Amid Labour Shortages

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Poland and Hungary have introduced stricter measures to limit the employment of non-EU workers as both governments seek to address public concerns over immigration. Poland has reduced work permits for non-EU citizens, while Hungary has stopped issuing worker visas to applicants from several countries, including the Philippines, Georgia, and Armenia.

Business groups and economists have warned that the restrictions could worsen labour shortages and slow economic growth. Many industries in both countries rely heavily on foreign workers due to ageing populations and declining birth rates, with employers saying they are already struggling to fill vacancies.

Companies have also raised concerns about delays in processing work and residence permits, prompting some skilled workers to relocate to other European countries. While the governments say they are balancing economic needs with immigration policies, businesses fear tighter rules could affect expansion plans and long-term competitiveness.

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German Investor Confidence Jumps in July

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Investor confidence in Germany improved sharply in July, exceeding market expectations, according to the latest survey by the ZEW economic research institute. The economic sentiment index more than doubled to 26.3 points, up from 10.5 in June, outperforming analysts’ forecast of 17.5 points.

ZEW President Achim Wambach said the stronger outlook reflects growing optimism that the German government’s recent reform package is beginning to have a positive impact. The measures, announced by Chancellor Friedrich Merz, include pension, tax, labour, and bureaucracy reforms aimed at boosting economic growth, employment, and competitiveness.

Despite the improved sentiment, the assessment of Germany’s current economic conditions remained negative, though it showed slight improvement. The current conditions index rose to -77.6 points in July from -81.0 points in June, indicating that while confidence is strengthening, economic challenges persist.

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