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The European Commission on Thursday formally warned Italy that its budget plans for 2019 are a serious concern, demanding "clarifications" from Rome over its unprecedented deviation from EU rules. Italian sovereign debt yields hit fresh multi-year highs by the close of the week, as investors are growing increasingly cautious over lending to the anti-establishment Italian government.

Brussels has demanded Italy cut spending and reduce its public deficit in order to pare down its debt pile.

Italy was not supposed to be on the agenda at the recent European Union summit in Brussels, but the ongoing impasse has brought it to the fore, with the worry being that the Eurozone's second most indebted nation (after Greece) could cause ructions within the shared currency bloc.

EU Commission chief Jean-Claude Juncker said the EU has always been generous with Italy when it comes to assessing its budget, and that EU leaders had already approached him to make sure not to be too flexible on strict deficit and debt levels when combing through the details of Italy's spending plans.

While Brussels has no real powers over countries' budgets, governments go to great lengths to avoid a reprimand because of the potential market implications it could have. This means Italy will fall foul of a previously mandated maximum deficit level of 0.8% of GDP.

Italy, the euro zone's third largest economy, has prepared an expansionary 2019 budget that sets up a showdown with authorities in Brussels over compliance with European Union rules.

The latest political news centering on Italy's latest budget pushed the common currency Euro to a fresh 1-week trough on concerns over political tensions within the Eurozone.

It includes a series of pension and tax changes that will cost 37 billion euros ($43 billion), of which 22 billion will be paid for by expanding the deficit.

"Even in the near term, Moody's believes that the fiscal stimulus will provide a more limited boost to growth than the government assumes".

Giuseppe Conte also faced discontent over the 2019 fiscal plan at home, calling a meeting of the government for Saturday to stave off an emerging internal rift over conditions of a partial tax amnesty.

Analysts say Rome is in a good bargaining position, given the Eurozone's ongoing difficulties with Brexit.

Meanwhile, market participants say the recent euro devaluation against the pound sterling could be connected to Italy's budget woes.

Ahead of the meeting, Italy had on Wednesday insisted it would not budge on the budget, putting Rome squarely on course for a clash with Brussels.

"The 2.4% figure is a ceiling for all the various measures included in the budget, but it's not a given that all of them can be implemented because there could be technical difficulties", Giorgetti said.