Italy faces hardening EU attitudes against its deficit-busting plans

The Italian government's plans to flout eurozone budget discipline rules are a "risk" for the entire European Union, Austrian Chancellor Sebastian Kurz said on Friday.

His remarks suggested there was little tolerance among EU peers for Rome's profligacy, setting the stage for a confrontation that could destabilize Italy's economy, the eurozone's third largest.

"The European Union is an economic and values-based community and works because there are common rules that everybody has to keep to," Kurz said in Brussels.

"If you break these rules and Italy deviates from [eurozone rules] then it means Italy is endangering itself but, beyond that of course, is also endangering others," he added.

"We as the European Union are not prepared to take over this risk, these debts, for Italy," said Kurz, whose country currently holds the EU's rotating presidency.

On Thursday, the European Commission warned Italy's government that it was on course for an "unprecedented" deviation from agreed fiscal targets.

The EU executive gave Italy until Monday to respond to concerns about optimistic growth estimates and insufficient debt and deficit reduction.

On a visit to Rome, EU Economy Commissioner Pierre Moscovici denied that the commission was already set on issuing an outright rejection of Italy's budget plans, a move that would be unprecedented.

"The idea is to find solutions, even if we are not in agreement," Moscovici said. "The aim of the European Commission is to reassure, reassure and have a dialogue," he added.

Nevertheless, an Italian government source told dpa that a negative EU verdict would likely come on Tuesday, when the European Commission is due to hold its weekly meeting in Strasbourg.

Moscovici said he did not expect ongoing market jitters in Italy to spread to other eurozone economies. When asked if he feared contagion risks, he said, "No."

Rome's ruling populist parties are set on raising public borrowing to fund tax, welfare and pension giveaways, and stimulate a flagging economy with extra government spending.

The plans have raised eyebrows in Brussels and among investors because Italy already has one of the world's highest debt levels, equal to more than 130 per cent of gross domestic product (GDP).

Rising market concern has caused a surge in Italy's "spread," a country risk indicator measuring the yield differential between Italian and benchmark German 10-year bonds.

On Friday it rose above 340 basis points, the highest level since March 2013, but later fell under 320. Five months ago, before the current government took office, the index stood at around 130.

Investors were made even more nervous on Friday by tensions between the ruling League and Five Star Movement (M5S), but the spread fell as those tensions eased in the afternoon.

M5S leader Luigi Di Maio sparred with League counterpart Matteo Salvini over the terms of a tax amnesty which Di Maio sees as overly generous.

The amnesty was discussed and approved by the cabinet, but Di Maio claimed that the decision was later changed behind his back. A new cabinet meeting on Saturday was due to resolve the row.