ROME — The European Union upped the ante in a standoff with Italy on Wednesday, taking another step toward punishing a government that has repeatedly flaunted its fiscal rules by insisting on a heavy-spending budget that fails to bring down the country’s burdensome debt.
“With what the Italian government has put on the table, we see a risk of the country sleepwalking into instability,” the European Commission vice president, Valdis Dombrovskis, said.
The country, which is led by populist and anti-establishment forces, was a case of “particularly serious noncompliance,” he added.
The European Commission, the bloc’s executive branch, will now turn its negative assessment of the budget over to eurozone countries. In two weeks, they could give the commission the green light to start an “excessive deficit procedure” against Italy, which could lead to steep fines.
Italy is the eurozone’s third-largest economy, and its crippling debt and minuscule growth is a source of deep concern in Brussels and international markets. A financial collapse there has the potential to infect and, some say, sink the entire European economy.
Within Italy, the budget has exposed tensions and the opposing priorities of the populist coalition government, led by Matteo Salvini, of the populist League party, and Luigi Di Maio, of the Five Star Movement.
But both are happy to fight the European Union, and both have a history of skepticism when it comes to membership of the euro. Ahead of European Parliament elections in May, both parties need an enemy to run against, and with migrant landings down, bureaucrats in Brussels fit the bill nicely.
Brussels had rejected a previous version of the budget, but the Italian government responded earlier this month with only small amendments. The new round of budget rejection and Italian defiance on Wednesday, when the commission made its annual review of eurozone spending plans, was completely expected.
“We are still committed to our budget,” Prime Minister Giovanni Conte told reporters, adding that the Italian government was sure of its position but that he would “be very willing” to discuss it with Jean-Claude Juncker, the president of the European Commission, when they met to discuss next steps at a dinner in Brussels on Saturday.
“A letter arrived from Brussels? I was expecting one from Santa Claus,” said Mr. Salvini, the deputy prime minister and the most powerful force in the Italian government, who has suggested that Mr. Junker has a drinking problem.
He added that he would be polite in discussing the budget with European Union officials but would not be persuaded to reinstate the previous government’s pension reductions. “Italy has a need to grow,” he told reporters.
A report in the Turin-based newspaper La Stampa, citing anonymous sources, suggested that Mr. Salvini could be willing to significantly soften his position. That appeared to mute the market reaction, but a spokeswoman for Mr. Salvini disputed the report on Wednesday.
“To the citizens we say have no fear because we will not retreat,” said Francesco D’Uva, a member of Parliament with the Five Star Movement. “We weren’t elected to enact the same destructive policies of the old governments.”
The Italians say that austerity measures imposed by Brussels and the powerful northern European countries that have sway there have suffocated the Italian economy.
They argue that only through spending — on a citizens’ income, generous pensions, and reduced taxes — can they stimulate the stuck Italian economy, and that they will then bring down their deficit — currently at 132 percent of output, more than twice the European Union limit — through growth.
But the European Union, and other international institutions and ratings services, have deemed Italian growth projections to be fanciful and overly optimistic. The reality, critics and opponents of the government said, was that Wednesday marked a decline in the country’s standing.
“Today a very sad thing happened to our country,” said Pier Carlo Padoan, the finance minister in the previous Democratic Party administration.
“I am very worried,” said Antonio Tajani, the president of European Parliament and a top official in Forza Italia, the center-right party of the former prime minister Silvio Berlusconi.
He pointed to the risk premium on Italian government bonds that consistently hovers in dangerous territory, to the poor performance of the Italian stock market and to rising investor anxiety.
“The Italian citizens don’t deserve this disaster due to an irresponsible government that, instead of resolving the problems of Italians, everyday invents new enemies,” Mr. Tajani said.
Despite the posturing of both sides, the process leading to sanctions is lengthy, and leaves plenty of time for Brussels and Rome to find a compromise and avoid a confrontation that would further destabilize the European Union when it is already struggling with slower economic growth and Britain’s planned departure.
The Italian Parliament has to approve a budget by Dec. 31, which leaves time to change proposals. And some members of European Parliament have suggested that Brussels should bend.
Sven Giegold, a German member of the European Parliament from the Green Party, said that, while the excessive deficit procedure against Italy was unavoidable under European Union rules, the commission should be willing to compromise.
“More spending could be sensible if it revives Italy’s economy,” Mr. Giegold said in a statement. “Both sides should give ground.”
The question is whether Brussels will stand firm and whether there is any pressure — outside of crippling market reactions — large enough to change the political calculus that appears to be motivating Italy’s coalition partners to refuse to budge. Both the League and Five Star are looking to increase their domestic popularity, and leverage, ahead of May’s elections.
“We are convinced of the numbers we put in our budget,” Mr. Salvini said on Wednesday. “We’ll go forward.”