Italy's populist government has refused to revised its free-spending budget plans as demanded by the EU Commission in an unprecedented move last month, saying it will stick to a target deficit of 2.4 percent - triple the previous administration's - and a growth forecast of 1.5 percent.
Italian government bond yields rose sharply on Wednesday on the news amid fears that its budget decision would raise borrowing costs. The Milan stock exchange was trading 1 percent down.
In a letter to the European Commission posted online overnight, finance minister Giovanni Tria asked for flexibility, citing the cost of recent natural disasters and the collapse of a major bridge in Genoa but said the planned 2.4 deficit for 2019 was "insuperable".
"The need to kick-start growth in order to bridge the continuing gap between current and pre-crisis levels of gross domestic product and to counter a slowdown of the economic cycle remains the priority," read the letter, which said spending would be closely monitored.
"Thanks to fiscal expansion, the implementation of reforms, the relaunch of investments and an easing of the tax burden on small companies, the budget will propel higher growth....the government is confident it can achieve the growth targets contained in its draft budgetary plan," it said.
The government will sell state assets worth 1 percent of economic output in 2019 in order to "accelerate" and "protect from possible macroeconomic shocks" the reduction of Italy's deficit to GDP ratio, which will come down to 126 percent by 2021 from 131.2 percent in 2017, the letter stated.
Both of Italy's deputy premiers, anti-establishment Five-Star Movement chief Luigi di Maio, and far-right League party leader Matteo Salvini also vowed on Tuesday that the government would not revise its 2.4 percent deficit and 1.5 percent growth targets for 2019.
There was no immediate comment from the European Commission, which will now decide whether to begin disciplinary measures against Rome over its budget. The EU executive could launch “excessive deficit procedure” that could eventually result in fines, though these have never been levied on any eurozone country.
The European Commission last month gave Italy until 13 November to submit a revised budget plan, saying the 2.4 percent deficit target flouted a previous commitment to lower the deficit and called the 1.5 percent growth forecast over-optimistic.
The International Monetary Fund has said Italy's fiscal stimulus plans would leave the eurozone's third-biggest economy vulnerable to higher interest rates that could ultimately plunge it into recession.
Ratings agency Moody's cut Italy's sovereign debt rating to one notch above junk status last month due to concerns over the government's budget plans, which have alarmed Brussels and roiled financial markets.
Italy's debt as a proportion of GDP is the second highest in the eurozone's after Greece.
