The European Commission has again rejected Italy's proposed budget on Wednesday, paving the way for financial sanctions to be applied in the next few months.

The Commission confirmed its assessment that "Italy's draft budget plan is in particularly serious non-compliance" with EU debt rules, Commission Vice President Valdis Dombrovskis said in Brussels.

Dombrovskis said with the Italian government's current plan "we see a risk of the country sleepwalking into instability."

"We conclude that the opening of a debt-based excessive deficit procedure is warranted," he added, referring to the EU's disciplinary process against member states for over-spending.

The Commission's process is required for countries whose debt levels are above the eurozone threshold and who are not doing enough to reduce borrowing.

<div class="opinary-widget-embed" data-poll="do-you-sympathize-with-italys-defiance-o" data-customer="deutschewelleeng"></div> <script async type="text/javascript" src="//widgets.opinary.com/embed.js"></script>

Italy's government still defiant

The country's government, led by a coalition between the populist Five-Star Movement and the far-right League, has remained largely defiant towards Brussels.

On Wednesday, Matteo Salvini, Italy's interior minister and deputy prime minister, said any EU sanctions against Rome would be "disrespectful" towards Italians.

"We are convinced about the numbers in our budget. We will talk about it in a year's time," he told reporters.

Rome and the Commission had been at odds for weeks over Italy's budget after it had been rejected by the Commission a first time.

Last week Italy submitted a revised version of its budget with only minor adjustments that did not satisfy the Commission and EU member states.

Watch video 01:17 Share Italy's game of nerves with the EU Send Facebook google+ Whatsapp Tumblr linkedin stumble Digg reddit Newsvine Permalink https://p.dw.com/p/38UWG Italy's game of nerves with the EU

A 'very moderately' expansionary budget

The proposed budget aims to increase spending, which according to the government is the only way to jump-start the country's ailing economy after years of austerity.

On Monday, Italian Economy Minister Giovanni Tria described the budget as "very moderately" expansionary. But the Commission believes such an increase in spending could be dangerous for Italy and the whole eurozone.

Italy plans to raise its budget deficit to 2.4 percent of gross domestic product (GDP) — eight times more than the previous government's target.

However, the Commission sees Italy's growth forecast as overly optimistic and has calculated that with Italy's planned spending increase, the budget deficit would breach the EU's 3 percent limit by 2020.

The proposed budget also backs away from the previous government's commitment to reduce borrowing — a delicate issue for Italy.

With a debt-to-GDP ratio of 130 percent, Italy's debt level is second only to Greece within the eurozone. That is way above the recommended debt-to-GDP ratio for eurozone countries, which stands at 60 percent.

Such high debt could hinder Italy's ability to continue borrowing and be an obstacle for growth. It also potentially risks a new debt crisis like the one of 2011-2012, which threatened to destroy the euro.

Italy's populist government: Key players Conte: Novice at the helm Giuseppe Conte, a little-known law professor with no political experience, was picked by the League and 5-Star Movement (M5S) as their candidate for prime minister. He was forced to temporarily give up his leadership bid after the parties' cabinet selection was initially blocked. However, after the two parties struck a deal with President Sergio Mattarella, Conte was eventually sworn in on June 1.

Italy's populist government: Key players Mattarella: President with the final say President Sergio Mattarella faced calls for his impeachment after he prevented the populist alliance from taking office. He singled out its choice for finance minister, Paolo Savona, warning that an openly euroskeptic minister in that position went against the parties' joint promise to simply "change Europe for the better." After the parties agreed to replace Savona, Mattarella gave the go-ahead.

Italy's populist government: Key players Di Maio: Anti-austerity advocate M5S chief Luigi Di Maio secured his party 32 percent of the vote in the March election. With the populist M5S-League coalition in power, Di Maio assumed the role of joint deputy prime minister and took over the economic development portfolio. The M5S leader has come under fire for his anti-immigration rhetoric, including calling rescue missions to save migrants from drowning a "sea-taxi service."

Italy's populist government: Key players Salvini: 'The Captain' Matteo Salvini is the leader of the anti-immigrant, euroskeptic League, which won 17 percent of the vote in the March election. A former MEP, he and his party have no experience in governing. Salvini has taken on the position of interior minister within Conte's Cabinet. Known for his hostile rhetoric toward immigrants and the EU, Salvini once described the euro a "crime against humanity."

Italy's populist government: Key players Savona: Anti-euro radical Paola Savona, initially tipped to lead the Finance Ministry, has called the euro a "German cage" and said that Italy needs a plan to leave the single currency. The 81-year-old's stance won him the backing of most Italian lawmakers but that wasn't enough to stop his appointment being vetoed. In his place steps Giovanni Tria, an economics professor without any previous government experience.

Italy's populist government: Key players Cottarelli: Temporary caretaker Carlo Cottarelli was set to become Italy's caretaker prime minster after the M5S-League alliance failed to have its controversial cabinet picks approved. The former IMF economist's time in the spotlight was short-lived, however. Political uncertainty in Italy rocked Europe's financial markets and prompted Mattarella to swiftly renegotiate and approve Salvini and Di Maio's governing coalition.

Italy's populist government: Key players Berlusconi: Vanquished enabler Silvio Berlusconi (right) and his Forza Italia entered a four-party electoral alliance including League in the March election that secured the bloc 37 percent. Berlusconi is now upset at his right-wing ally Salvini after the League leader moved to work with M5S. Berlusconi has said he would act as a "reasonable and scrutinizing opposition." Author: Chase Winter



What happens next

The Commission's report on Italy is the first step towards the EU's excessive deficit procedure, a legal disciplinary action that can be brought against countries that breach the eurozone's debt threshold.

It will be some time, however, before the procedure, which can include hefty fines, will have any consequences for Italy.

To officially trigger the legal procedure, the Commission needs to get approval from EU member states, in particular from the bloc's finance ministers, likely at their next meeting in January.

Italy will be then be issued a new deadline to amend its budget — and reduce spending and borrowing — within three to six months.

Only at this point, if Italy still fails to comply, can the Commission apply financial sanctions, which can include fines up to 0.2 percent of GDP — about €3.5 billion ($4 billion) in Italy's case — or cuts to EU subsidies.

gs/sms (Reuters, dpa)

DW editors send out a selection of the day's hard news and quality feature journalism. You can sign up to receive it here.