But Vitor Constancio has warned the anti-establishment coalition of Lega’s Matteo Salvini and Five Star Movement’s Luigi Di Maio they “cannot beat the market”.
Italy has been on a collision course with the EU ever since unveiling budget plans to run a budget deficit amounting to 2.4 percent of GDP, which would amount to roughly almost £40 billion (€44 billion).
The proposals do not exceed the three percent ceiling set out in EU rules, but Italy had previously pledged to the cut the deficit significantly to reduce its mammoth debt, which is approaching €2.5 trillion.
Mr Constancio, the European Central Bank’s financial stability chief, said the situation was extremely difficult to resolve because the EU were effectively powerless to compel Italy to change its plans.
However, speaking at an economic forum in Brussels, he warned Mr Salvini, Mr Di Maio and Italian Prime Minister Giuseppe Conte: “Financial markets will dictate the outcome.
“Italy cannot win against the market.”
He added: “The euro area will withstand and overcome the next crisis.”
Lorenzo Bini-Smaghi, the chairman of Society General, told Italian newspaper Avvenire: “Italy is going straight into a wall.
“The crash is going to be violent.”
Lorenzo Codogno of LC Macro Advisors said: “This is hugely dangerous.
“Italy is miles away from the required debt reduction.”
Valdis Dombrovskis, the Commission Vice President responsible for the euro, said the EU executive believed Rome’s fiscal calculations were based on “”overly optimistic assumptions.”
Speaking during a trip to Helsinki, he said: ”Basically the assumption is that if they increase public spending, it will stimulate the economy and thus will help to reduce budget deficit.
“We see that this is actually not materialising.”
So far there are no signs of a truce in the ongoing dispute, with the European Commission, which last month rejected Italy’s budget and asked for revised plans to be submitted within three weeks, yesterday saying Italy’s plans were based on unrealistic assumptions about growth.
The Commission’s economic forecast suggest’s Italy’s deficit will hit 2.9 percent of GDP next year and then rise to 3.1 percent in 2020, which would break bloc-wide regulations.
Italy’s financial minister Giovanni Tria struck a defiant note, dismissing the figures as “technical incompetence” and pledging his government would stick to the plans which were agreed by the country’s Parliament.
There is significant concern in financial circles about the prospect of market pressure setting of a chain reaction in the economics of countries in southern Europe commonly referred to as “contagion”.
Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, who earlier this week warned of the possibility of sanctions against Italy if it did not reconsider, has said this has not happened so far.
However, in its regional outlook published yesterday, the International Monetary Fund (IMF) said: “Contagion from future stress could be notable, especially for economies with weaker macroeconomic fundamentals and limited policy buffers.”