Italy is under growing market scrutiny as Prime Minister Giorgia Meloni prepares a difficult 2024 budget. Investors are dismayed by government moves affecting sectors from banks to airlines. The Treasury will issue new economic targets on Wednesday providing the framework for a budget in which Meloni will attempt to keep her tax-cutting promises while also lowering the fiscal deficit. With one of the eurozone’s highest debt burdens, Meloni is seeking to cut taxes for families and businesses to spur growth, while reducing the gap between Italian bonds yields and safer German bunds.

The move is a key test for Meloni’s ability to bring her government’s budgetary and economic policy into line with EU rules, and will have broad implications for investors in Europe. If the plan is not well executed, Rome may face a fresh confrontation with Brussels, with markets likely to react negatively. Amid signs of rising economic turbulence, the European Central Bank may soon need to tighten its monetary policy to keep inflation in check and prevent sovereign bond yields from jumping too far above its target level of just below 2 percent.

Investors have been jittery since Meloni’s government took power in June 2022. In its first few months, the coalition broke from the social policies of the previous government led by Prime Minister Giuseppe Conte, suspending a citizens’ income scheme and scrapping planned rises in sales tax. Amid these pitfalls, the coalition is struggling to meet policy targets agreed with Brussels in order to unlock billions in post-pandemic recovery funding.

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The government has sought to signal a shift in foreign policy as well, with Meloni’s Brothers of Italy political bloc allied to the European Conservatives and Reformists group. She has said she sees the Hungarian government of Viktor Orban as an inspiration, citing his battle to assert national sovereignty over EU law and the European Court of Justice. The Brothers of Italy have also taken a tough stance on immigration and have called for the introduction of a cap on migrants entering Italy from Africa.

But Meloni must carefully balance her domestic and foreign policy ambitions. A recent survey by Eurobarometer found that while 46% of Italians say they tend to trust the EU, a majority, 63%, says they don’t trust their own country’s parliament or government. Adding to the pressure, Italy’s international reputation has been damaged by its controversial asylum system and its inability to stop migrant flows across the Mediterranean to Europe. This could be an obstacle to any plans for greater international engagement. Despite the challenges, analysts expect Meloni to stick with her plan. “It’s too early to write off the coalition,” said an economist at Milan’s Bocconi university. “As long as it has a majority in parliament, I don’t think it will collapse.” But he added that further market turmoil is possible if the coalition fails to deliver on its promises. In a sign of the risks, the spread between Italian and German 10-year bond yields hit its widest since late May, indicating the market’s anxiety.