The Italian government vowed to stand firm on its 2019 draft budget on Tuesday, ignoring a deadline set by the European Commission to revise its plans.

Although Italy did make minor adjustments, the revisions are not likely to persuade the Commission, putting Italy in a high-stakes standoff with Brussels that could result in financial sanctions.

Arm wrestling between Italy and the EU

Shortly before the midnight deadline, Italy's Deputy Prime Minister Luigi Di Maio announced that the government would not change its ambitious social spending plan, arguing that the increased spending is necessary to promote growth after years of austerity.

Italy's draft budget will raise the budget deficit to 2.4 percent of gross domestic product (GDP) — a stark increase compared to the previous government's target of 0.8 percent

The European Commission's forecast, on the other hand, expected a higher budget deficit which would breach the EU's 3.0 percent limit by 2020.

Italy now runs the risk of being fined up to 0.2 percent of GDP — which would amount to about €3.5 billion ($3.9 billion).

The Italian government did make some adjustments, saying that it plans to sell some government real estate to raise cash. Di Maio did not detail what would be sold, but said the properties won't include "the family jewels."

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'The budget will not change'

Deputy Prime Minister Di Maio, who leads the populist 5-Star Movement, announced the move in Rome on Tuesday evening following a ministerial meeting.

"The budget will not change, neither in its balance sheet nor in its growth forecast. We have the conviction that this is the budget needed for the country to get going again," Di Maio said on Tuesday evening after a ministerial meeting.

Speaking at the European Parliament on Tuesday, German Chancellor Angela Merkel said the EU wanted to reach out to Italy, but that the eurozone will only work "if every individual member fulfills their responsibility for sustainable finances."

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



Why is a higher deficit in Italy a problem? A rising budget deficit inflates a country's public debt. As it stands, Italy has one of the highest debt-to-GDP ratios in the EU — 130 percent of GDP, second only to Greece. Within the Eurozone, the recommended debt-to-GDP ratio is 60 percent. Rising levels of public debt would threaten Italy's credibility in global markets and, according to economists, be a hindrance to growth.

Why does Italy's government want to increase spending? The country's coalition government, formed through an alliance between the populist 5-Star Movement and the far-right League, believes increased spending is the only way to jump-start the country's economic growth. The government's plan to increase spending is aimed at implementing a series of electoral promises, including lower taxes, a lowering of the retirement age, and a universal income.

What happens next: If EU officials reject the budget again, the Commission can trigger legal action under an excessive deficit procedure. EU member states would then have to approve the Commission's proposal and Italy would be given another deadline to make the necessary amendments. If Italy still refuses to comply, the Commission can then apply fines up to 0.2 percent of GDP or cut EU regional subsidies.

rs, gs/ (AFP, dpa, Reuters)

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