BRUSSELS — The European Union’s impatience with the populist government of Italy and its free-spending ways ratcheted up a notch on Wednesday, with Brussels warning that it would take legal action unless Italy reduces its budget deficits.
The European Commission said that Italy breached budget rules last year and was on course to do so again in 2019 and 2020, with its public debt already hitting just more than 132 percent of gross domestic product and rising, far in excess of eurozone guidelines of 60 percent.
Italy is also heading in 2020 for an annual budget deficit higher than 3 percent of G.D.P., which is a more important guideline, after giving in to Brussels on this year’s budget, which is expected to have a deficit of 2.5 percent of G.D.P. The structural deficit — the underlying deficit without interest payments — is also widening.
Other countries breach the rules, too. France, for instance, is on course for a budget deficit higher than 3 percent of G.D.P. after loosening up spending to respond to protests from the Yellow Vest movement. And France’s public debt is more than 98 percent of G.D.P.
But Italy’s case is especially troublesome because of its stagnant economy and populist-run government, which has promised to cut taxes further while increasing spending to satisfy its voters and to try to get the economy growing. After years of zero growth, growth this year is estimated at just 0.1 percent, compared with 1.1 percent for the eurozone as a whole.
Italy’s deputy prime minister, Matteo Salvini, of the League, did very well in recent European Parliament elections on a populist platform denouncing Brussels. He has promised a 15 percent flat income tax, while his weaker coalition partner, Luigi Di Maio, of the Five Star Movement, pushed through an expensive welfare program, known as the citizen’s income, that more than 500,000 Italians have so far qualified for.
Mr. Salvini and Mr. Di Maio have even floated the idea for Italy to have some sort of parallel currency to the euro, small-denomination government bonds for payments in arrears, which has hardly eased anxieties in Brussels or financial markets.
While a lot of Italy’s debt is held by Italians, economists worry that a debt crisis in the country, one of the eurozone’s largest economies, would create a mess much worse than the one Greece set off in 2010. And some of the needed fixes to support the euro in a crisis are not yet in place. Bailing out Rome would be almost impossible.
The Brussels warning is the start of a process that must be approved by member states but that could mean a formal “excessive debt procedure” that might confront Rome with billions of euros in fines. Where that money would come from is never clear in a budget already under strain.
As it is, said Commission Vice President Valdis Dombrovskis, “Italy pays as much in debt servicing as for the entire education system.” In 2018, Italy’s debt represented an average burden of 38,400 euros per person, he said, and average debt servicing cost 1,000 euros a year.
Mr. Salvini, who has regularly criticized the eurozone’s budget rules, said in a note on Wednesday that the only way to reduce Italy’s debt was to cut taxes and allow Italians “to work more and better.”
He blamed cuts, sanctions and austerity for ballooning Italy’s debt and increasing poverty and unemployment. “We have to do the opposite,” he said. “We don’t want anyone’s money. We only want to invest in work, growth, research and infrastructure. I am certain that Brussels will respect this will.”
That’s unlikely. But other officials in Rome said they were working with Brussels to avoid confrontation and penalties.
On Wednesday, Prime Minister Giuseppe Conte said, “I would do anything to avoid an infringement procedure.” On Monday, he threatened to quit if Mr. Salvini and Mr. Di Maio didn’t settle down to the business of governing, after weeks of acrimonious sideswipes on the campaign trail.
Mr. Conte’s threat to quit led to a phone call between the two deputy prime ministers and an apparent truce without any guarantees that it would last beyond the next spat.
In a statement issued Wednesday evening, the Italian government noted the warning and said it had sent the European Commission a “set of justifications (the so-called relevant factors) for its failure to lower the debt to G.D.P. ratio in 2018.”
But it said that Italy was on track to respect the European Union fiscal rules this year, and would continue conversations with the commission. According to the latest data, the government said, the budget deficit for 2019 will be 2.1 percent of G.D.P., not the 2.5 percent the commission projects.
No country has ever been fined by Brussels for violating fiscal rules. But the warning, if followed by the excessive deficit procedure, could lead to higher costs for Italy to borrow in the markets. That could either help bring the government to heel or produce a serious challenge to the eurozone.