Italy budget 'sleepwalking into instability' - Commission Published duration 21 November 2018

image copyright AFP image caption Italy's PM Giuseppe Conte and his two deputies are facing pressure from Brussels

The European Commission has taken the first step towards sanctioning Italy over its national budget in an ongoing row over the country's finances.

In October, the EU executive body rejected Italy's draft budget and told it to make changes - an unprecedented event in European politics.

Italy, however, said it would stick to its high-spending goals.

On Wednesday, the Commission said formal proceedings that could bring financial sanctions were "warranted".

Its report cited a "particularly serious non-compliance with the fiscal recommendation for 2019", and Commission Vice-President Valdis Dombrovskis said: "With what the Italian government has put on the table, we see a risk of the country sleepwalking into instability."

He said that the EU's disciplinary measure known as "excessive deficit procedure" (EDP) was now appropriate.

Italy's populist-led government had already been told by the Commission to revise its budget, because of the high level of national debt, which eurozone officials worry could cause instability for the entire bloc.

But the Rome government failed to make significant changes, putting the country on a collision course with Brussels.

Under the rules of the sanction procedure, potential consequences include a fine of 0.2% of GDP - which for Italy's economy would cost billions of euros - and a halt on the payment of any development funds.

However, the process could take a long time, and Mr Dombrovskis said he was still open to talks with Italy on how to address the disagreement.

Italy's deputy prime minister, Matteo Salvini, told reporters he remained convinced about his government's budget plans. Prime Minister Giuseppe Conte said he would meet Commission President Jean-Claude Juncker on Saturday to highlight the budget's "solidity and effectiveness".

How did we get here?

Italy's current government took office in June 2018 and is a coalition of the anti-establishment Five Star Movement and right-wing League.

Widely seen as a populist coalition, the first national budget of new government was hammered out in September,

The problem for EU officials was its high cost for a country facing massive debts. The government planned to rack up a budget deficit of 2.4% of GDP to finance its plans.

The Commission had hoped for a lower budget cost as the previous government's plans were for a 0.8% deficit.

Italy is the third-largest economy in the eurozone, but has more than two trillion euros in debt - which is 131% of the country's entire economic output.

To put that in context, it is second only to Greece (178%), and far higher than the UK (88%) or Germany (64.1%). The debt is equivalent to about €37,000 for every person in Italy.

The government argues that additional investment is needed to kick-start the sluggish Italian economy, which has still not recovered from the financial crisis of a decade ago.

Italy's statistics agency Istat forecast on Wednesday that the economy would grow by 1.3% in 2019, and 1.1% in 2018.

While it said the budget would help boost demand in the Italian economy, its 2019 estimate is below the government's figure of 1.5%.

Shortly before the League-Five Star government came to power, Istat forecast a growth figure of 1.4% for 2018, and it said on Wednesday that growth was slowing in comparison with 2017.

Why is Italy's budget so expensive?

Italy's government hailed the budget as one that would "end poverty".

The draft budget included the fulfilment of election promises , such as reversing plans to raise the retirement age and a guaranteed basic income of €780 (£700; $890) for poor families. Those two plans alone were expected to total about 0.7% of Italy's GDP.