Every civilised person loves Italy with its great history and culture – the splendours of Renaissance art, Italian literature and music – rooted in the past. Italians have an innate sense of style, a warmth of emotion expressed directly and without inhibition, an instinct for displays and large gestures in life as in art, which the Maltese admire.

But if you were to ask officials in Brussels or Berlin which country keeps them awake at night, the answer, I gather, is always the same: Italy. I would have thought it would be all too easy to imagine that the only thing that would matter to Brussels at present is Brexit.

From a European perspective, however, Brexit is not the biggest headache.

For a Brussels bureaucrat, it is more worrying to think about Rome than Westminster. Threatening “to take back control” when you are outside the single currency is bad enough. But threatening to do so – as Italy is – when it is the eurozone’s third largest economy is far worse.

Since the financial crash of 2008, Italy has been in recession as often as not. Forecast economic growth has been one of the slowest in the eurozone. Italy’s chronically low growth and gigantic public debt burden (132 per cent of GDP) create a potentially deadly combination. The banks are stuffed with bad loans and still pose a headache.

Real income per head is lower than when Italy joined the euro almost 20 years ago. Youth unemployment stands at about 38 per cent and the employment rate is among the lowest in the 36 countries belonging to the Organisation for Economic Cooperation and Development.

Is it any wonder that barely half the population of this traditionally pro-European country thinks the euro was a good idea?

Politically, a coalition government made up of Beppe Grillo’s anti-establishment Five Star Movement and Matteo Salvini’s populist right-wing League has created a brew of political and financial risk that has Brussels sweating. Italy’s populist government took office in June promising to reject years of austerity policies and to pump cash into the economy through welfare spending and tax cuts. It claims this would kick-start GDP growth in Italy.

Countries within the eurozone are supposed to stick to the fiscal rules.

If a country misbehaves it can be placed under the European Commission’s “excessive deficit procedure”. Once the procedure is triggered the country can be made to stand in the Brussels equivalent of the corner and, in extremis, it will mean fines being imposed, potential loss of access to EU structural funds and banishment from the European Central Bank’s quantitative easing programme.

The reality is that Italy is too big either to bail out – its economy is about seven times as large as that of Greece – or to fail

As a direct consequence, downgrades from the international credit ratings agencies may follow. Moody’s and Standard & Poor’s already have effected downgrades.

If Italy’s debt rating is downgraded one more notch to junk status, this would risk a run on the euro, similar to that of the Greek debt crisis in 2009.

Two weeks ago, the Italian finance minister submitted Italy’s 2019 draft budgetary plan to the European Commission against a background of two unhelpful economic factors.

First, a deteriorating underlying economic situation for Italy, which was worse than anticipated when official forecasts were made in March.

And, secondly, despite the impact of this economic downturn on tax revenues and hence on the budget deficit, the Italian government was determined to press ahead with providing a fiscal stimulus by boosting welfare spending, cutting the retirement age and increasing the deficit.

A poll has shown almost 60 per cent of Italians back the new budget.

Last week, the European Commission responded. It accused Italy of “particularly serious non-compliance” with eurozone budget rules. It has ordered it to tear up its free-spending budget in an unprecedented financial rebuke of a major state. Giving Italy’s populist government three weeks to re-write its budget, the Commission has warned Italy against thinking it could “break free” of eurozone austerity rules.

But the move risks triggering a new crisis for the euro. Fears that Italy’s deficit could prompt another European financial crisis has sent shudders through the financial markets and raised Italy’s borrowing costs.

Italy’s government has said it is determined to increase public spending despite having the second highest national debt in the eurozone.

Italy’s budget proposal would push the country’s deficit to 2.4 per cent (instead of the target agreed by the Council of Ministers of 1.8 per cent). This is too high for Brussels given that Italy’s public debt, at 132 per cent of GDP, is second only to Greece. The Commission is reluctant to go easy on Italy, but Brussels also wants to avoid appearing too aggressive towards Rome to avoid more eurosceptic anger and possibly precipitating a decision by Italy to leave the eurozone. The threat of Italexit may not be hollow.

If Italy defies the Commission, Brussels could begin its excessive deficit procedure against Rome, leading to sanctions worth 0.5 per cent of annual GDP, or €9 billion.

Salvini, the interior minister, said the European Commission was “not attacking a government, but a people”.

The European Commissioner for financial affairs has accused the new government of a “clear and intentional deviation from commitments”.

He added: “Italy must continue its efforts to lower its debt because it is the enemy of the economy.”

EU sanctions on Italy could be decided next spring. They would provide the populist Salvini with perfect ammunition for the elections to the European Parliament in May. He sees the Commission’s action as a plot to bring down Italy.

“I’d say there is a George Soros-like manoeuvre by speculators [Soros is a hate figure for populists] betting on Italy’s bankruptcy to be able to buy up the healthy Italian companies that remain at a cut price,” he said.

For Malta, what happens in Italy and its knock-on effects in the eurozone more generally – and globally – is a matter of great consequence, and also of great peril.

We are, as always, prey to events largely outside our control, but massively affected by them. The reality is that Italy is too big either to bail out – its economy is about seven times as large as that of Greece – or to fail.

This is a Times of Malta print opinion piece