The European Union's executive arm, which supervises national budget plans, has invited eurozone countries to examine its assessment in two weeks and, if they agree with it, the Commission would launch an "excessive deficit procedure" that could result in fines for Italy.
The warning, while not rare in EU terms, has been marked by tensions between the Commission and Italy's populist government, which has vowed to resist any pressure from Brussels and continue with its spending plans.
"It is with regret that today we confirm our assessment that Italy's draft budget plan is in particularly serious non-compliance," EU Commission Vice-President Valdis Dombrovskis told reporters. "The situation in Italy is of common concern. Euro area countries are in the same team and should be playing by the same rules. These rules are here to protect us, to provide certainty, stability and mutual trust."
He said that launching an excessive deficit procedure is "warranted." Dombrovskis said Italy's debt load of 131 percent of GDP forecast for the next two years puts 37,000 euros ($42,300) of debt burden and 1,000 euros of debt servicing on each Italian every year.
Sanctions can be launched when countries breach, or are in risk of breaching, the deficit threshold of 3 percent of GDP or when they violate the debt rule by having a government debt level above 60 percent.
"We cannot see how perpetuating this vulnerability will increase economic serenity," Dombrovskis said. "Instead, I believe it could result in more austerity down the road." Italy's debt load is the second-highest in Europe, after Greece. Many are concerned about new financial turmoil in Europe should Italy lose control of spending, but the government in Rome says a sharp increase in spending is needed to jumpstart growth.
Italy has the eurozone's third-biggest biggest economy. Saving Greece was hard enough; bailing out Italy would be all but impossible. But its government argues the spending is necessary to relaunch economic growth after years of austerity. It wants to boost social welfare programs that will benefit mostly young job seekers and restore pensions that had been slashed by a previous government.
The Commission's analysis says the measures will not boost growth but will rather necessitate new budget cuts in the future. "This step which we take today is the logical and unavoidable consequence of the decision taken by Italy's authorities not to modify their fiscal targets," said EU Economy Commissioner Pierre Moscovici.
Eurozone and EU finance ministers meet in Brussels on Dec 3-4. So far, they have been reluctant to criticize a partner government, preferring instead to say that it's up to the Commission to police the rules.
In Rome, Italian Deputy Prime Minister Matteo Salvini indicated he would not back down on plans to roll-back the unpopular pension reform, which would allow thousands to retire in the coming months. "A letter arrived from Brussels? I was expecting one from Santa Claus," said Salvini, who leads one of the two ruling populist parties, The League. "We will discuss it politely as we always have. We will exchange opinions. I will continue. If someone wants to persuade me that the pension reform was right, I will not be persuaded."
Analyst Lorenzo Codogno of Macro Advisers said that EU finance ministers could decide to grant Italy more time — possibly several months — to show that it's taking "effective action" to address the problem.
He predicted that with elections for the European Parliament due in May and a new Commission starting work in a year, "the debate on Italy will stall for a while at the European level."
Barry reported from Milan, Italy.