Rome, Italy – The European Commission has taken the first steps in fining Italy over its national budget, saying it deviates from the EU’s fiscal rules and commitments made by the previous government.

The move comes as Italy, which received a European Commission request to adjust its 2019 budget to meet EU parameters, refused to make any substantial changes.

Commission Vice-President Valdis Dombrovskis said on Wednesday: “With what the Italian government has put on the table, we see a risk of the country sleepwalking into instability.”

The Commission said formal proceedings that could bring financial sanctions were “warranted”.

In its report, the executive of the European Union said: “The opening of a procedure for excessive deficit based on the debt is therefore justified.”

Italy’s far-right Interior Minister Matteo Salvini reacted to the news with customary defiance.

“Has the letter from Brussels arrived? I’m waiting for one from Father Christmas too,” Salvini said. “We will politely talk as we have always done. We will have dialogue. I’m going to keep going.”

Italy’s debt

Italy’s 2019 budget includes tax cuts that will benefit middle-income, self-employed workers – partially fulfilling an electoral promise made to Salvini’s right-wing voters – a “basic income” for the unemployed called for by the anti-establishment Five Star Movement led by labour minister Luigi di Maio and the lowering of pension age, revising an unpopular reform made during Europe’s financial crisis.

The next steps will be taken on December 3 and 4, when European finance ministers will meet to decide whether to act against Italy for violating a debt reduction rule, considering that Italy’s debt is over 130 percent of its gross domestic product (GDP), second only to that of ailing Greece in the EU.

Wednesday’s report confirms a previous opinion expressed by the Commission, which considers the Italian budget based on an overly optimistic growth forecast.

The actual procedure is unlikely to be launched before the Italian Parliament approves the budget by December 31.

It could eventually see the EU apply fines against Italy of up to 0.5 percent of its GDP.

This process could take up to six months, in which Italy will be given time to make revisions, coming close to the EU election in May 2019.

“In the end, it doesn’t mean for sure that there will be a sanction,” explains Gregory Claeys, an economist at the Brussels-based think-tank Bruegel.

“There are countries that have been in an excessive deficit procedure for years, like France or Spain, without adding a sanction. I think the main difference between those cases and the Italian case is that the financial markets are already a bit nervous about Italy because the debt is much higher than in other Eurozone countries,” Claeys said, adding that the EU’s opinion will “send a bad signal to the financial markets”.

‘Could lead to a spiral’

This could have serious consequences on the Italian economy, as Italy would end up paying a much higher interest on its debt.

“We have already seen that the market’s reactions in the past few days have not been positive,” Arianna Giovannini, a senior lecturer at De Montfort University and chair of the Italian politics specialist group at the UK-based Political Studies Association, told Al Jazeera. “This could lead to a spiral at the economic level, and the beginning of an actual crisis, a recession in Italy which, in my opinion, the country cannot afford,” she added.

According to recent polls, the Italian government has about 60 percent of voters’ consensus, with the League, the far-right party led by Salvini, nearly doubling it since the government was installed last June.

According to Giovannini, at the Italian political level, the standoff between Italy and the EU could play in favour of the League, which has been able to draw much consensus by touting a hard line on migration.

“Should the Italian government open to a compromise with the EU eventually, it is the Five Star Movement that stands to lose in the equation,” Giovannini argued. “The League has other arguments that seem to have much appeal on the electorate. On the other hand, if the Five Star Movement is not able to pursue the policies it has promised, the decline we have seen could broaden.”

For the European Commission, which has to confront the rise of populist movements not only in Italy but in other European countries as well, it’s a lose-lose situation.

“If they do something, they will be used as a scapegoat in the European election in Italy. If they don’t do anything, they will be bashed by populist movements in other European countries like the Netherlands or Germany. In all cases, they will favour eurosceptic movements in some countries of the EU,” Claeys told Al Jazeera.

It's a cold shower for populists that shows objective obstacles in building this European populist bloc. Carlo Ruzza, sociology professor at the University of Trento

“Populists are on the rise, while there is a counter-movement that is trying to understand what to do. But it understands it little and badly,” Carlo Ruzza, sociology professor at the University of Trento who writes on populist movements, told Al Jazeera. “The anti-populist bloc is led by Macron in a moment in which Macron himself is weak.”

Ruzza suggests that Italy’s action has exposed underlying tensions between northern and southern Europe, exemplified by Austrian and Dutch foreign ministers expressing concern last week over Italy’s decision to go ahead without heeding the European Commission’s requests.

“It’s a cold shower for populists that shows objective obstacles in building this European populist bloc,” Ruzza said. “By definition, radical right-wing populism is nationalist, and Salvini [and his will to build a European populist bloc] is limited, while Italy’s ways give the impression of jeopardising the economic interests of European countries.”