European Commission Vice President Valdis Dombrovskis said the "agreement is not ideal" but allows the Commission to avoid legal action against Italy, "provided that the measures are fully implemented."
The Commission, which supervises the budgetary plans of EU countries to ensure they respect the euro rule book, said it had been reassured by new fiscal measures provided by the Italian government on Wednesday. Italy's revised plans call for a budget deficit of 2.04 percent of GDP, down from the original 2.4 percent that had sparked the EU alarm.
Premier Giuseppe Conte told Parliament that the revisions maintained the populist government's key campaign promises of a basic income for job-seekers and a rollback on an unpopular pension reform pledged. But they include a tax on digital services and a "temporary solidarity contribution" from public servants receiving high-end pensions.
"We didn't betray and will never betray the trust of Italians," Conte said. The Commission said no action would be taken if the measures "are voted by the Italian parliament before the end of the year." The Commission can launch sanctions 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 of GDP.
Lorenzo Codogno, an economist with LC Macro Advisors and a former Italian treasury official, said the new budget had more realistic growth forecasts of 1 percent for 2019 compared with1.5 percent, but that it still was dependent on luxury tax increases in coming years that Italy in the past has been reluctant to impose.
"At face value, this looks like a patchy compromise, which allows both the Italian government and the Commission to buy time and kick the can down the road, possibly until after European elections," Codogno said.
The threat of legal action called "excessive deficit procedures" is not rare in the EU but this one came amid growing tension between the Commission and Italy's populist government, which had vowed to resist any pressure from Brussels.
Dombrovskis said "the Italian government has come a long way" from the heated rhetoric of a few weeks ago. EU Economy Commissioner Pierre Moscovici added that the agreement "shows that the European Commission is not the enemy of the Italian people."
Italy's debt load is the second-highest in Europe after Greece at over 130 percent of GDP. Many are concerned about new financial turmoil in Europe should Italy lose control of spending, but the government in Rome was insisting that a sharp increase in spending is needed to jumpstart economic growth.