Italy and EU are playing game of Jenga with the world's economy
It was well-flagged that once Italy formally submitted its draft budget on Monday that the EU would make the unprecedented step of requesting a reworked version within three weeks.
Italy had let it be known it was targeting a budget deficit of 2.4pc, more than the previously agreed figure of 1.6pc and outside the EU's fiscal guidelines. There's no surprise either that Italy's Interior Minister Matteo Salvini has refused to back down "even one millimetre" from the draft.
The face-off between Italy and the EU has been branded an 'arm wrestle with Brussels'. This plays to Salvini's hardman image, but it's more like a game of economic Jenga; a game that could ultimately bring the world's economy crashing down around our ears.
The EU's tactics are clear, it will employ the same methods it did against Greece, which is to stare down the government until the markets' reaction forced the government into a retreat, while at the same time hoping to avoid contagion to the EU's fragile recovery.
EU Commission President Jean-Claude Junker indicated this a couple of weeks ago when Italy first announced its plans to overspend and likened Italy to Greece stating, "We have to do everything to avoid a new Greece - this time an Italy - crisis".
That sent the Italian 'spread', the difference between 10-year Italian bonds and risk-free German bonds, soaring to four-and-a-half year high of 3.4pc, with Moody's subsequently downgrading Italian credit rating to one level above junk, albeit with a stable outlook.
If the message was a short sharp shock to Rome, it wasn't heeded, and it has gone ahead with its budget as planned.
The markets again reacted once the draft budget was submitted on Monday, but the effect has not been as dramatic as it could have been, with a rally that left the spread at 3.03pc.
The EU might try to treat Italy like Greece, but the truth is, Italy is not Greece. It is potentially a bigger problem, but it is also the 3rd largest economy in the eurozone and its fourth largest exporter. Debt is at 132pc of GDP and the country's banks are too big and too indebted for Germany to bail out, even if they had an appetite to do so. Angela Merkel is not as strong as she was and has her own fires to put out at home.
This is one major headache that the EU really could do without in the middle of very messy divorce negotiations with Britain and Salvini knows it. However, we saw in Ireland and with Greece that when it comes to fiscal matters, the EU has a will of iron and is not for turning, it will do everything it can to turn the screw on the populist government and turn the people against it.
The seemingly irrepressible Silvio Berlusconi was eventually undone by the 'spread' reaching 7pc, forcing him to stand down and hand the reigns of power to autocrat Mario Monti, and the EU will be hoping for more of the same.
While the populist government, and particularly Salvini, is enjoying high approval ratings now, there is no will among the Italian people to leave the euro and return to the lira. Italian's personal savings remain high and that will ensure they remain committed. Both Salvini and Deputy Prime Minister Luigi Di Maio have declared their intentions not to leave the euro, but we've seen them talk out both sides of their mouths also, as they previously committed to towing the line on spending in Europe.
The proposed budget deficit of 2.4pc is high, but Rome has pledged to rein in spending to a 2pc deficit in 2020. "As stated on several occasions, the budget manoeuvre that this government is preparing to launch is brave and responsible, focusing on the growth and well-being of citizens," the Italian Finance Minister Giovanni Tria wrote in a letter to EU officials before the formal submission.
Part of this proposed 2020 fiscal correction is dependent on a proposed plan to slash defence spending by half a billion next year, a move that will not impress Brussels either. Especially as Prime Minister Giuseppe Conte made a visit to Moscow last week to fawn all over Vladimir Putin and once again call for an end to sanctions. Russia is an important trading partner of Italy and sanctions have disproportionately hurt the Italian economy.
The Italian economy has remained stagnant for over a decade, a whole generation of Italians have faced emigration or remain in poverty with no prospect of a career or owning their own home. Austerity was the condition that incubated the rise of the League and the Five Star Movement and Italians are weary of enforced fiscal responsibility when what they crave is growth.
Rome will continue to paint the EU as the enemy of the people, however, it is somewhat inconvenient for Salvini that three of the EU's top six officials are Italian. Mario Draghi is ECB president, Antonio Tajani is president of the European Parliament and Federica Mogherini is the EU's foreign policy chief.
The EU will most likely wheel out the Italians to face the Italians in this game of Jenga that gets more precarious by the day.