EU Commissioner Pierre Moscovici gives a press conference in Brussels on November 21, 2018 | John Thys/AFP via Getty Images Commission calls for disciplinary action against Italy over budget plans Brussels says door remains open for further dialogue.

Italy should face disciplinary action after "serious non-compliance " with EU fiscal rules, the European Commission said Wednesday.

The EU’s executive arm made the announcement in a report containing a damning opinion on Italy’s draft budget plans for next year, which include generous giveaways like a basic income for the poor and tax breaks for others.

The report calls on the Council of the EU to green light a process that could see the Commission smack Rome with a so-called excessive deficit procedure (EDP) — a disciplinary measure for countries that breach the bloc’s budget deficit and public debt rules.

"This step we take today is the logical and unavoidable consequence … of the Italian decision … not to revise [its budget plans]," said the Commission's chief for economic affairs, Pierre Moscovici. But he was also quick to extend an olive branch, tweeting: "Our door remains open to dialogue with Italy."

Budget opinions are part of an annual Commission exercise for which all EU governments send their spending plans to Brussels for inspection. An EDP for Italy would set out the “effective action” Rome needs to take to bring its public finances back in line with the rules. If ignored, the Commission can ultimately fine Italy up to 0.5 percent of its GDP, or about €9 billion.

EU fiscal rules require that governments keep their budget deficits under 3 percent of gross domestic product (GDP) and avoid breaching the public debt ceiling of 60 percent of GDP.

Italy has the second-highest public debt pile in the EU after Greece, amounting to around 131 percent of GDP. To help tackle that debt, the previous Italian government had promised the Commission it would keep its deficit next year to 0.8 percent of GDP. But Italy's draft budget for 2019 envisions it at 2.4 percent.

The Commission’s report concludes that “Italy's large public debt is a major vulnerability for the Italian economy and decisively reducing it should remain a priority in the best interest” of the country. It went on to criticize the government’s spending plans, which are “not projected to comply with the debt reduction benchmark in either 2018 or 2019.”

The report also takes aim at the country’s plans to “backtrack” on pension reforms and “the introduction of a tax amnesty” that “could discourage tax compliance.”

Continued defiance in Rome

Top Italian government officials remain defiant.

“A new letter from Brussels is here? Great, we’ll wait for Santa Claus’ now,” Deputy Prime Minister and Interior Minister Matteo Salvini said immediately after the publication of the Commission report. In a tweet, the leader of the far-right League also said, "the EU should respect the Italian people considering Italy pays the EU €5 billion more than it receives."

Beneath the surface, however, two MPs with knowledge of the talks within the Cabinet said top League officials are concerned about the markets’ nervous reaction. League officials are also worried that the ongoing confrontation with Brussels, which could impact the banking sector, will anger their voter base mainly made up of small business owners and professionals in the north.

Meanwhile, Laura Agea, anti-establishment party 5Stars' chief of delegation in the European Parliament, said: “We respect the EU principle of fiscal responsibility, but we want to focus first on the growth. It’s our right. Italy won't change its 2019 budget deficit. Austerity is a serious threat to European economy because it brings more poverty without cutting the debts."

One lawmaker in Rome familiar with 5Stars leader and Deputy Prime Minister Luigi Di Maio’s thinking explained, “he’s the hard-liner — he’s the one who won’t give up on the basic income pledge and therefore, he’ll be the hardest to convince to change the draft."

Prime Minister Giuseppe Conte, for his part, was a bit more understated and said he would “discuss the core of the budget draft with [Commission President Jean-Claude] Juncker on Saturday night. But he insisted the government is convinced of the validity of its position. “I’m not going to sit down to discuss how the EDP should be structured; rather, I’ll ask him to avoid triggering it,” he said.

But Italy is as isolated as ever. For instance, the Hungarian government’s spokesperson, Zoltan Kovacs, a close ally of Viktor Orban and a supporter of Salvini, was in Rome on Wednesday and called on Italy to respect the bloc's rules.

“Hungary’s turnaround came when we decided we would respect EU rules … If you abide by the rules in Europe, results can be achieved,” he said.

Italy has time on its side, and EU financial penalties for Rome's budget defiance are still a long way off.

The Council of the EU now has two weeks to respond to the Commission's report. EU finance ministers are expected to discuss Rome’s budget when they gather in Brussels on December 4 for their regular ECOFIN meeting. But a senior EU official familiar with the next planned steps said the ECOFIN in late January was more likely for its signoff on the report. That's when the Commission can trigger the EDP.

Rome would then have another three to six months to comply with the Commission’s EDP demands. Failing that, the Commission can begin recommending fines, which too would need to get the green light from ECOFIN.

Moscovici said he feels “relatively comfortable” about the timeline when asked if the long process undermined the disciplinary nature of the EDP.

“It’s neither too weak nor too strong,” the Frenchman said. “If it would be slower and weaker, then it would be useless. [But] if it would be stronger and more rapid, it would look maybe illegitimate.”