The European Commission has rejected Italy’s budget.
The dismissal has been the EU’s first ever rejection of a country’s draft budget proposal and is likely to worsen the divide between Rome and Brussels.
“Today for the first time the commission is obliged to request a euro area country to revise its draft budgetary plan, but we see no alternative,” said the European Commission vice president Valdis Dombrovskis.
According to the Italian news agency AGI, Italy will not be fined but must revise the budget within the next three weeks. Failure to do so will result in an “excessive deficit procedure” which could result in millions of euros’ worth of fines.
“Experience has shown time and again that higher fiscal deficits and debt do not bring lasting growth,” said Dombrovskis.
“And excessive debt makes your economy more vulnerable to future crisis.”
Yields on Italian bonds rose on the news.
According to Goldman Sachs (NYSE: GS) economist, Silvia Ardagna, Italy’s “market situation may need to get worse before it gets better.”
“From this perspective, our view is that market tensions would need to intensify in order to exert sufficient pressure on the Italian political system to trigger a change in the policy path and the political rhetoric around it,” she said.
“On that basis – and even if Italy does not stay there before it gets better.”
Italy has defended the budget and said that hard decisions are necessary in order to encourage growth.