On August 7, Italy’s right-wing Government led by Giorgia Meloni announced a controversial windfall tax on the allegedly “excess profits” of the country’s banks.

The intervention was partly justified by the low benefits from higher interest rates that Italian banks have passed on to their depositors compared to their European peers, and by the need to raise fiscal resources to shield poorer households from the inflation crisis.

However, the haphazard modality with which it was introduced has created turmoil for markets and required substantial modifications, which ultimately limited its scope.

Both the ECB and the Italian Banking Association (ABI) have criticised the measure. Even within Meloni’s right-wing coalition, Forza Italia has advocated for changes to exclude smaller lending institutions from the measure.

As a result, the tax is now estimated to generate a fraction of the original resources, but the government’s move has blemished Italy’s risk perception in the markets and foreshadows the political and economic challenges the government will face in the upcoming months.