Brussels - The European Commission has formally put Italy on notice about its deteriorating deficit and snowballing debt, re-opening a political battle with populist-led Rome.
The move by the EU's executive arm against Italy's bloated budget begins a complicated process that -- if approved by eurozone ministers -- could result in an unprecedented fine of more than three billion euros ($3.4 billion).
"We have concluded that... a debt-based excessive deficit procedure is warranted for Italy," EU commission vice president Valdis Dombrovskis told reporters Wednesday, adding that bloc ministers must confirm the decision.
Italy's far right Deputy Prime Minister Matteo Salvini vowed not to yield to the EU, but some in Rome fear the fractured government could collapse under the pressure from Brussels.
In a statement, Salvini said austerity policies demanded by Brussels "increased debt and poverty".
"The only way to reduce debt from the past is to lower taxes and allow Italians to work more and better," he said.
Luigi Di Maio, the Five-Star deputy prime minister in the coalition government also dismissed Brussels' warning, calling it "too easy".
"We will go to Europe and discuss responsibly... but it's tough, when you see that every day they find another reason to say bad things about Italy and this government," Di Maio said.
Italian Prime Minister Giuseppe Conte said in a statement that he "took note" of the Commission's decision but recalled that Italy planned on reducing deficit to 1.5 percent of Gross Domestic Product by 2022.
The threat to put Italy in the sin bin comes on the same day that the commission officially proposed to remove Spain from the procedure, with Brussels satisfied that Madrid's public spending was back under control a decade after the financial crisis.
"This marks the end of a long and painful road not only for Spain but for the entire European Union and the eurozone," EU Economic Affairs Commissioner Pierre Moscovici said.
Italy's public debt is a big problem and now sits at 2.3 trillion euros ($2.6 trillion), or 132.2 percent of Italy's GDP -- way above the 60 percent EU ceiling.
- 'Sanctions are highly unlikely' -
"Instead of being reduced, Italy's public debt, which represents a significant burden on the economy, has increased further" in 2018, Moscovici said.
The commission is convinced that the debt will keep ramping up, leaving Italy vulnerable to economic shocks, with the country's creaky banking system seen as especially fragile.
Italian Finance Minister Giovanni Tria on Friday told Brussels that his government would do what it takes to rein in the debt, but without providing details.
"My door is open" for dialogue, Moscovici insisted in Brussels.
The feud with Rome comes just months after an earlier flare-up over Italy's draft budget for 2019.
Last year's technical recession had put intense pressure on the government in the eurozone's third largest economy, which won power in June on the back of big-spending electoral promises that ignored EU rules.
In a historic first, in October the Commission rejected Italy's budget, which promised a universal basic income and scrapped pension reform.
The government was forced to water down its costly pledges in December to avoid punishment and soaring borrowing costs on the markets.
Debt in the euro zone
The EU's tough attitude is driven by spending hawks in the Netherlands and Germany, which want eurozone partners to strictly abide by budget rules despite arguments that tightening the purse strings only stokes populism.
Given EU member states' reluctance, "sanctions are highly unlikely," argued Alessandro Gasparotti of the Germany-based Centre for European Politics.
"Therefore effective pressure on Italy to reconsider its policies can only come from the capital markets," he added.
The EU similarly took Spain and Portugal to task in 2016 for overspending, but held back from imposing fines at the last minute.
Comparing public debt across the EU
No country has ever been sanctioned by the EU for breaking EU budget rules. Powerful France often breaks the rules, leading some to accuse Brussels of being too lenient on a powerful member while coming down hard on smaller offenders.
"If the European Commission wants to be a credible defender of the (budget rules), it has to treat all offenders equally and that means also launching a procedure against France," Markus Ferber, an MEP from Germany, told the Guardian.
Brussels estimated on Wednesday that the French public finances were "globally" on track despite a public deficit slightly higher for 2019 than the EU's three percent limit.
By Alex Pigman and Charlotte Mason