ROME (Reuters) - Italy said on Thursday it would resist pressure from Brussels to revise its big-spending budget, effectively daring EU authorities to punish it with fines ahead of May’s European parliamentary elections.

FILE PHOTO: Italy's Minister of Labor and Industry Luigi Di Maio, Prime Minister Giuseppe Conte and Interior Minister Matteo Salvini leave at the end of a news conference after a cabinet meeting at Chigi Palace in Rome, Italy, October 20 2018. REUTERS/Remo Casilli/File Photo

Leaders of Rome’s populist government said they would press ahead with expanding the deficit next year, a day after the European Commission kicked off disciplinary procedures against Italy over that plan in a dispute that has alarmed the whole euro zone.

“We will not take a backward step,” Deputy Prime Minister Matteo Salvini told state-owned television Rai. “We’re not spending this money at random. The idea is for Italy to grow.”

Salvini wants his League - one of two parties that formed a governing coalition in June - to help trim the European Union’s powers over member states and spearhead a populist attack on the European parliament at next year’s elections.

His coalition partner and co-deputy prime minister, Luigi Di Maio of the anti-establishment 5-Star party, also said Rome would not back down before then.

“I rule out spending-cutting measures before the EU vote,” Di Maio told journalists in parliament, saying many European countries would have reasons to change the “rules of the game” in Europe thereafter.

The government argues a budget expansion will boost economic growth and in turn tax revenues, bringing down its 2.3-trillion-euro ($2.63 trillion) public debt, which represents about 130 percent of economic output.

The Commission disagrees, saying Italy must do more to ease its debt burden, proportionally the euro zone’s second highest after Greece.

MARKET OPTIMISM

The clash with the EU, whose fiscal rules designed to protect the euro zone from a debt crisis Brussels says Rome is breaking, is worrying investors.

It has dented the single currency and sent Italy’s borrowing costs surging and shares its banks tumbling.

But on Thursday, with the start of the Commission’s excessive deficit procedure having pushed back any action against Italy into next year, Italian bond yields fell sharply for a second day as investors chose to focus on conciliatory rather than confrontational comments.

Di Maio also said he saw room for dialogue with the Commission, while economic affairs commissioner Pierre Moscovici voiced confidence that an agreement could be reached.

“I’m convinced that eventually we are going to get there because it’s in the common interest,” Moscovici told the finance and European commissions in France’s lower house of parliament.

Italy’s Prime Minister Giuseppe Conte, who will meet Commission President Jean-Claude Juncker in Brussels on Saturday, indicated that Rome was expecting EU partners to demand budget changes and wanted to delay any moves.

Euro zone finance ministers could use a meeting in January to adopt Commission recommendations on what Italy should do to comply with EU rules, and set a deadline of 3-6 months for Rome to act. Failure to do so could trigger sanctions.

“In the event that (finance ministers) decide to adhere to the Commission’s recommendation, we will ask for very long implementation times,” Conte told parliament.

Economy Minister Giovanni Tria, who is a university professor with no party affiliation, hinted that Rome might even be willing to change the budget, telling reporters there would be “new elements” once talks with the Commission kicked off.

Italy’s borrowing costs remain uncomfortably high, with the yield on its 10-year state paper trading at more than 300 basis points above the German equivalent, leading bank lending rates to edge higher and cooling investor appetite for Italian bonds.

Ordinary Italians snubbed a retail bond this week due to the increased risk for the country’s debt.

If the row is not resolved, Brussels could eventually levy a fine of up to 0.2 percent of Italy’s gross domestic product and freeze billions of euros in EU funds.