In a letter addressed to Italian Finance Minister, Giovanni Tria, the European Commission rejected Italy’s 2019 budget draft, labelling it a serious breach of EU budget rules after the Italian government said it planned to increase its already record-high spending, which would cause Italy’s public debt to be out of line with the EU’s rules on stability and growth.

The EU warned in the letter that Italy’s proposed 0.8 percent increase in its deficit is a significant deviation from the structural improvement of 0.6 percent of GDP recommended by the EU Council.

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Italy’s planned government spending growth of 2.7% is about 2.6% higher than the maximum allowed under EU rules, which cap this at 0.1%, and allows the EU executive to accuse Italy of non-compliance with the budgetary policy obligations, even as it tried to continue constructive dialogue with Italy to reach a final assessment.

“Italy’s government debt standing at around 130% of GDP, our preliminary assessment also indicates that Italy’s plans would not ensure compliance with the debt criterion benchmark … which requires a steady reduction of the debt level towards the 60% threshold,” the letter said.”

‘Non-negotiable’ says Salvini and Di Maio

Italy’s Deputy Prime Minister Matteo Salvini and his coalition partner and counterpart, Luigi Di Maio, have made it clear that there will be no negotiations or adjustments to the draft budgetary plan that was submitted on October 15 to the European Commission.

The markets have reacted to the standoff with widespread panic. Italian sovereign debt yields hit fresh multi-year highs by the close of the week, as investors are growing increasingly cautious over lending to the anti-establishment Italian government.

The currency markets also reacted to the news of the Commission’s letter with concern, causing the Euro to devalue to a one-week low against the US dollar.