Italy risks penalty for failure to respect EU spending rules

Italy risks disciplinary action for violating European Union spending rules after it was found that the nation's public debt stood at more than 130 percent of GDP in 2018 – far above the EU's 60 percent limit.

The European Commission warned that a "snowball effect" was likely to see the situation worsen in 2019 and 2020, and recommended legal action.

The European Council will consider whether to start an "excessive deficit procedure" against Rome that could result in billions of euros in fines.

"When we look at the Italian economy, we are seeing the damage recent policy choices are doing," Commission Vice-President Valdis Dombrovskis told reporters on Wednesday.

"To be clear, today we are not opening a procedure," Dombrovskis said, adding that there were multiple steps to go before Italy saw any sanctions.

Italy's Minister of Economy and Finance, Giovanni Tria, said earlier in the week that Italy's debt problems were due to an economic downturn and promised that the upcoming budget 2020 would adhere to EU rules.

European Economic Commissioner Pierre Moscovici said this week that the EU prefers dialogue to sanctions, but added that Italy must be required to follow European rules.

Italy's populist governing coalition is trying to avoid budget cuts and tax increases. However, the dominant coalition partner, the right-wing party the League, has promised to cut taxes and has proposed a heavy-spending budget for 2020.

The EU's Economic and Financial Committee, made up of national finance ministers and the heads of central banks in member states, will now have two weeks to decide whether to back the recommendation to proceed with disciplinary action.

If they do, the European Commission can then formally call for the opening of disciplinary action against Italy. In the event Italy is considered non-compliant in applying the EU guidelines, it could end up being slapped with unprecedented sanctions.

Italy's far-right Deputy Prime Minister Matteo Salvini has called the EU's budget rules "obsolete", and plans to introduce major cuts that will increase the deficit.

"I'm sure that in Brussels they will respect our will," said Salvini. "The only way to cut the debt created in the past is to cut taxes."

"Cuts, sanctions and austerity have only produced more debt, poverty, precariousness and unemployment. We need to do the opposite," he added.

Fellow Deputy Prime Minister Luigi Di Maio, leader of the League's coalition partner the Five Star Movement, said politicians would "go to Europe and discuss (the issue) responsibly".

But, he added: "It's tough, when you see that every day they find another reason to say bad things about Italy and this government."

The warning on Wednesday is the latest to be made by the European Commission over Italy's spending. The country only just avoided the same disciplinary procedure in December by lowering an initial target for the budget deficit this year.

On Monday, Italy's Prime Minister Giuseppe Conte threatened to resign if tensions within the government were not resolved. Conte urged the League and the FSM to end their bickering or risk another showdown with the newly installed European Commission.