Brussels moves to issue sanctions against Italy over budget failure

The ongoing battle between the European Commission and Italy has deepened this morning, after Brussels said it will look at imposing a fine on the country over its failure to submit a budget proposal within EU rules.

The commission said it will now open a "debt-based excessive deficit procedure" (EDP), after it ruled that Italy's revised budget plan does not comply with the EU's criteria on debt reduction.

The Italian government has robustly defended its expansive budget plan to date, which allows for a deficit of 2.4 per cent of GDP for the next three years.

The budget was first rejected by the commission last month, with Italy later submitting an updated plan last week. The commission today called the Italian budget a "particularly serious case of non-compliance", which broke rules on spending given its "nominal" growth in GDP.

Italy's debt, at more than 130 per cent of GDP, is proportionally the second highest in the Eurozone after Greece.

"The impact of this budget on growth is likely to be negative in our view. It does not contain significant measures to boost potential growth, possibly the opposite," said European Commission vice president Valdis Dombrovskis.

"With what the Italian government has put on the table, we see a risk of the country sleepwalking into instability."

Italian deputy prime minister Matteo Salvini responded to say the country was not open to negotiation with the EU. 

"We are convinced about the numbers in our budget. We will talk about it in a year's time," he told reporters.

He added that any sanctions on the country would be considered "disrespectful" towards the Italian people.

Italian government bond yields had fallen ahead of the decision this morning, as investor confidence was buoyed by early rumours that Salvini may be willing to compromise.

Similarly, the euro strengthened to a daily high of $1.14, up 0.4 per cent, after Italian Prime Minister Giuseppe Conte said the country would respond with reforms regarding its bond spread.

Leaders of governments from across the Eurozone will now be required to submit their thoughts on the situation within the next two weeks, before the commission moves to begin legal proceedings for an EDP.