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Italy and the European Commission were on a collision course over Rome's 2015 budget plan, which Brussels says flouts EU recommendations but Rome says it has no intention of changing ahead of the deadline (15 October).
Italian Prime Minister Matteo Renzi, faced with a recession-bound economy, has set out an expansionary 2015 budget framework which funds tax cuts with new borrowing and targets only a marginal reduction in the budget deficit.
The Commission says Italy must cut the deficit more in order to rein in a public debt of more than 130% of gross domestic product, the highest in the eurozone after Greece. Renzi says the debt has risen because of persistent recession which is only exacerbated by fiscal tightening.
The Italian government is forecasting economic output to fall 0.3% this year, the third consecutive year of contraction, before rising by a meagre 0.6% in 2015.
The dispute revolves around the so-called "structural" budget deficit - adjusted for the business cycle and one-off factors - which Italy is proposing to reduce by just 0.1% of GDP. The Commission wants a much bigger cut of "at least 0.7%," an EU source told Reuters on Tuesday.