L IKE A COUPLE of prizefighters before a grudge match, the European Commission and the Italian government are standing toe to toe. On October 23rd Brussels demanded that the populist coalition in Rome rewrite its 2019 budget. It is the first time since the launch of the euro that the commission has rejected outright the fiscal blueprint of a member state.

It argues that the Italian budget represents a deviation from agreed targets “without precedent in the history of the stability pact”, the EU ’s agreement on disciplining public finances. The coalition partners in Rome, the anti-establishment Five Star Movement (M 5 S) and the hard-right Northern League, plan a deficit of 2.4% of GDP —three times the limit hammered out with Italy’s previous government.

Neither party’s leader gave any hint of flexibility in response. The commissioners, declared the League’s Matteo Salvini, were “not attacking a government, but a people”. His fellow deputy prime minister, Luigi Di Maio of the M5S , borrowed from Franklin Roosevelt to tell Italians: “The only thing to fear is fear itself.” His allusion was doubtless intentional: like FDR , Mr Di Maio, the main proponent of a higher deficit, sees the budget as laying the foundation for a New Deal that will deploy higher spending to lift Italy out of its prolonged economic stagnation.

The budget envisages an extension of welfare benefits to the poor and unemployed, and selective tax cuts. It also unpicks a pension reform so that some workers will be able to retire at 62. (The coalition imagines, unrealistically, that by shunting greybeards out of the workforce, it will create jobs for the young.) Parts of the budget might stimulate growth in the medium term, though much-needed reforms are missing. But what daunts the commission, and the markets is that, in the meantime, a wider deficit will not do enough to bring down Italy’s scary public debt of around 130% of GDP . The budget relies on growth projections that wildly exaggerate the multiplier effects of the new spending. The danger, then, is that failing confidence in Italy’s ability to repay its debts could trigger a renewed emergency in the euro zone. The concern over Italy focuses on a “doom loop” connecting euro-zone states to their banking systems: as investors demand ever-higher yields on Italian bonds (which are already at five-year highs), their value would decline, eroding the balance-sheets of Italy’s banks, which are stuffed with the paper. Moody’s, a ratings agency, downgraded Italian debt to one notch above junk on October 19th, and one index of banks’ share prices is down 20% since the start of the row a month ago. For years Italian debt has been the elephant in the room of the common currency area, a giant that has threatened a crisis in an economy that (unlike Greece’s) is far too big to bail out. The commission initially dealt with the new Italian government in a cautious spirit, encouraged by a compromise proposed by the finance minister, Giovanni Tria, of a 1.9% deficit. The commission hoped that by avoiding confrontational rhetoric and giving the government time it could help Mr Tria moderate his colleagues’ ambitions—his arguments bolstered by a steady rise in “lo spread”, the gap between Italian and German bond yields which the Italian media follow obsessively. It is now up to a dangerous 3.2 percentage points. On October 18th Pierre Moscovici, the doveish economic commissioner, visited Rome in a last-ditch bid to “clarify” the budget plans. But his visit only confirmed what many in Brussels have come to suspect: that Mr Tria has little real power in an idiosyncratic government dominated by party leaders to whom the commission has little access. Who will blink first? The fear of neither side backing down was credible enough this week to unsettle stockmarkets already fretting over the US -China trade dispute and the Khashoggi affair. Yet the time horizons in this dispute are long. The Italian government has until November 13th to reply to the commission’s rejection. Then the commission has another three weeks to reply to the reply. Even if no agreement is found, it could take until April, and the publication of new growth forecasts, for Brussels to launch its excessive-budget procedure, and another half-year for sanctions actually to be imposed.

Other factors will bolster the populists’ resolve. The soaring popularity of the League, which has nosed ahead of the M 5 S having almost doubled its poll ratings since the general election in March, has locked the coalition partners into a rivalry that leaves them little room for compromise. It will be particularly difficult for Mr Di Maio to back down, because he has touted the securing of cabinet approval for a bigger deficit as his main achievement since coming into office. “They want to be perceived as very tough,” says Giovanni Orsina, the director of the school of government at LUISS university in Rome. “There might be a compromise, but only if there is a significant effect on the spread. I don’t see them yielding to the commission, but they might yield to the financial markets.” So far the markets have not panicked.

The Italian drama looms over wider debates. A summit in December is due to discuss moves towards a common budget and a stronger bail-out fund for ailing banks—the modest remains of much grander reform proposals advanced by Emmanuel Macron, France’s president, last autumn. An alliance of hawkish Nordic and Baltic member states, dubbed the Hanseatic League, is opposed even to these mild proposals. A rule-breaking, commission-defying government in Rome makes it infinitely harder to persuade such sceptics that the plans do not jeopardise the savings and budgets of thrifty northern Europeans.