Italy on the verge of EU sanctions over budget row

Deputy Prime Minister and League party leader Matteo Salvini arrives to address a news conference at the League party headquarters, following the results of the European Parliament elections, in Milan, Italy. ReutersShow less

The European Union is on the verge of beginning a legal process that will trigger unprecedented sanctions against Italy, the bloc’s fourth largest economy, as its populist government pushes ahead with a contested budget plan.

Matteo Salvini, the leader of the Eurosceptic League party, embarked on a campaign to cut taxes and introduce a minimum wage for the unemployed that Brussels believes will further hit the country’s weak economy.

In a report on Italy's public finances published on Wednesday, the European Commission said it expected the debt ratio to rise in both 2019 and 2020 to rise over 135 per cent of the GDP due to a “snowball' effect.”

The EU commissioner for the euro and social dialogue, Valdis Dombrovskis, said the Italian economy already showed the signs of "the damage recent policy choices are doing" and called on the country's leaders to take action to reduce debt.

There needs to be a "renewed reform effort, not spending more where there is no fiscal space to do so," Mr Dombrovskis said.

But Italy's government showed little immediate interest in a policy change, leading Brussels to issue a final warning on Wednesday.  The disciplinary procedure, which has not yet been opened, could ultimately result in a fine of over 3 billion euros.

European Economic Commissioner Pierre Moscovici said on Sunday that the EU prefers dialogue to sanctions, but added that Italy must be required to follow European rules.

The right-wing League party promised tax cuts in its 2018 election campaign and is now determined to deliver on its populist promise. As a result, it proposed a heavy-spending budget for 2020 could end up being slapped with unprecedented sanctions.

Mr Salvini, who serves as Interior Minister and doubles as Deputy Prime Minister, said he was sure "that in Brussels they will respect our will."

"The only way to cut the debt created in the past is to cut taxes," he said. "Cuts, sanctions and austerity have only produced more debt, poverty, precariousness and unemployment. We need to do the opposite."

The League has kicked up its anti-EU rhetoric recently after leading May's European Parliament elections with more than 34% of the vote.

Fellow Deputy Prime Minister Luigi Di Maio, whose Five Star Movement is in a coalition government with Mr Salvini, said politicians would "go to Europe and discuss [the issue] responsibly".

But he also took aim at the EU, claiming that "It's tough, when you see that every day they find another reason to say bad things about Italy and this government."

The country narrowly averted the same procedure at the last minute in December by lowering an initial target for the budget deficit this year.