(From L) Italy's Deputy Prime Minister and Minister of Economic Development, Labour and Social Policies, Luigi Di Maio, Italy's Prime Minister, Giuseppe Conte and Italy's Deputy Prime Minister and Interior Minister, Matteo Salvini on October 15, 2018.

The European Commission, the EU's executive arm, announced Wednesday that disciplinary proceedings against Italy are warranted because it's breaking fiscal rules over its rising public debt.

The Commission said that in its latest assessment of member states' compliance with deficit and debt rules, it had concluded that when it comes to Italy "a debt-based EDP is warranted."

An EDP stands for an "Excessive Deficit Procedure" and is an action launched by the European Commission against any EU member state that exceeds the budgetary deficit ceiling or fails to reduce their debts. If an EDP went ahead, Italy could face a fine of around 3 billion euros ($3.4 billion), according to some reports.

"(The report) concludes that the debt criterion is not complied with and thus a debt-based excessive deficit procedure is warranted," Valdis Dombrovskis, the EU Commission vice-president for the euro and social dialogue, said at a press conference.

"To be clear, today we are not opening the EDP. First, EU member states have to give their views on ... the report and the (EU's) Economic and Financial Committee has two weeks to form its opinion on our conclusions. But it's much more than just about the procedure, when we look at the Italian economy we see the damage that recent policy choices are doing."

Worryingly for the Commission, Italy (Europe's third-largest economy) has the second-highest debt pile in the EU (expected to reach 133.7% this year) and was asked to explain why its debt had risen in 2018.

Dombrovskis said the Commission estimated that Italy's spending to service its debts in 2018 turned out to be 2.2 billion euros higher than expected in its 2018 spring forecast. He added that the country pays as much toward its debt servicing as it does toward its entire education system.

"Growth has come to almost a halt ... and we now expect the Italian debt (to GDP) ratio to rise in 2019 and 2020 to over 135%," he said.

Italian banking stocks fell 1% on the announcement Wednesday and the country's bond prices (the amount investors will pay to hold Italian debt) also declined, signaling a drop in risk appetite toward the country.