Weeks after the European Commission rejected Italy’s draft budget in an unprecedented move in EU history, it has now taken the first step for a punitive procedure as the populist government in Rome refused to make corrections.

The EU executive said in a report that Italy had “seriously violated” EU budget rules, thus paving the way for the introduction of financial sanctions against Rome.

The Commission first rejected the 2019 budget at the end of October as it projected annual budget deficit of 2.4% for 2019 – 2021, up from 0.8% planned by Italy’s previous center-left Cabinet, seemingly in order to fulfill their lavish election promises, and potentially to fuel economic growth.

Italy has the second biggest government debt (as a percentage of the GDP) in the Eurozone after Greece, presently standing at 131%, more than twice the recommended debt-to-GDP ratio of 60% for Eurozone countries.

Its Cabinet made of leftist and far-right populists (the Five Star Movement and the League) declared with much fanfare in September that it was ending austerity.

The Cabinet in Rome remained unyielding after Brussels’ initial rejection of its 2019 budget, now leading the Commission to propose starting an excessive deficit procedure the EU member state.

“Italy’s draft budget plan is in particularly serious non-compliance [with EU debt rules],” Commission Vice President Valdis Dombrovskis said in Brussels on Wednesday.

“We see a risk of the country sleepwalking into instability… We conclude that the opening of a debt-based excessive deficit procedure is warranted,” he added.

The EC move comes after last week Italy re-submitted its 2019 draft budget to Brussels but only with negligible adjustments.

While the Italian Cabinet maintains that the only way to boost Italy’s economic growth is to pour state spending in the economy, the European Commission deems its growth projections too optimistic.

It has calculated that Italy would breach the 3% budget deficit threshold, which is recommended for Eurozone states, in 2020, should the plan of the populist government be implemented.

“I can’t see how perpetuating this vulnerability would increase economic sovereignty. Instead, I believe it could result actually in more austerity down the road,” Dombrovskis declared.

Italy’s shaky state finances threaten a return to the debt crisis of 2010 – 2012 which posed a very serious risk to the fate of the euro.

While Wednesday’s report by the EC is a first step towards an excessive deficit procedure for Italy, it needs the approval of the finance ministers of the EU, which is likely to be secured at their next meeting in January.

Once that occurs, Italy would be given three to six months to fix the parts of its budget seen as problematic.

If Rome fails to do that, the EU would be entitled to impose on Italy fines of up to 0.2% of the country’s GDP, that is, about EUR 3.5 billion.

(Banner image: Valdis Dombrovskis on Twitter)