Drought, cheap EVs and a fragile recovery pull Italy in three directions

Italy's economy expanded by 0.54 percent in 2025, according to World Bank data — a figure that, set against the eurozone's broader ambitions, describes an economy moving but not accelerating. That pace leaves almost no buffer when external shocks land, and in August 2026 two have arrived simultaneously: a climate emergency in the north and a trade disruption from the east.

Euronews reported this week that the Po River has fallen to historically low levels near Pavia, the fourth heatwave of the summer having exposed wide stretches of dry riverbed across the plain that produces roughly a third of Italy's agricultural output. The economic arithmetic of a drought is cumulative: reduced irrigation capacity cuts yields, higher input costs follow, and food processors in Lombardy and Emilia-Romagna — industries that anchor the country's manufacturing export base — face tighter margins heading into autumn.

The currency adds a further complication. The euro has strengthened steadily against the dollar over the past month, moving from 1.1405 on 14 July to 1.1545 on 12 August, according to ECB exchange-rate data. A stronger euro lowers the cost of energy imports, which matters for a country that buys most of its gas abroad, but it simultaneously makes Italian goods more expensive in dollar-denominated markets. For exporters of machinery, wine and processed food — sectors that sell heavily into the United States — the direction of travel is unwelcome.

The Guardian reported on Sunday that Chinese electric vehicle sales across Europe have reached a record high, with Italy identified as one of the markets driving the surge. Chinese imports now account for 14 percent of the European EV market, the Guardian noted, amid claims of dumping and renewed scrutiny of EU tariff levels. For Italy, which hosts Stellantis production lines and a supplier network still calibrated to internal-combustion vehicles, a rapid shift in consumer preference toward lower-priced Chinese models is not merely a trade statistic — it is a structural threat to manufacturing employment in Piedmont and Lombardy.

Inflation, at 1.53 percent in 2025, is running well below the ECB's two-percent target. That sounds benign, but it reflects weak domestic demand as much as price stability. When households are cautious and wages are not rising in real terms, low inflation can signal stagnation rather than sound management. Unemployment at 6.39 percent is the lowest Italy has recorded in years, yet the headline figure obscures persistent inactivity among young workers and a continuing drain of skilled labour to northern Europe.

The Italy-Spain border dispute triggered by the Ceuta migration crisis — Deutsche Welle reported that Madrid introduced entry checks on travellers from Italy in retaliation for Rome's own controls — carries an economic dimension that commentary has largely overlooked. The Schengen Area is not just a political arrangement; it is a logistics infrastructure. Checks at the French and Spanish borders, even temporary ones, raise costs for road freight and slow the movement of seasonal workers and tourists at the peak of the summer season. The Local Italy reported that TUI, the travel group, sees bookings returning to normal levels, suggesting the broader tourism market remains resilient, but friction at borders is a tax on trade that no government formally announces.

The EUR/CHF rate of 0.9351 and EUR/GBP of 0.8548 reflect a euro that is broadly firm across its major crosses. For Italian luxury goods and fashion houses, sterling and franc buyers become marginally more price-sensitive as the euro rises — a consideration for an industry that depends on discretionary spending from Swiss and British consumers. The EUR/JPY rate of 183.72 indicates the yen remains historically weak, which continues to attract Japanese tourists to Italy but does little for the bilateral trade balance.

Taken together, the picture is of an economy that has achieved a degree of stability — low inflation, falling unemployment, a manageable exchange rate — but whose growth rate is too thin to absorb the compound pressures of climate disruption, an EV transition it did not lead, and a political environment that is generating friction with its nearest trading partners. The harvest on the Po plain, the tariff negotiations in Brussels over Chinese cars, and the temperature on the Brenner motorway this Ferragosto weekend are, in their different ways, all the same story.