BRUSSELS: The EU and Italy's populist government on Wednesday called a truce in their bitter row over Rome's disputed 2019 budget, as Brussels said revised spending plans fell within bloc rules.
In a historic first, the European Commission in October rejected Italy's original big-spending budget, which promised a universal basic income and a pension increase for low-wage earners.
"Intensive negotiations over the last two weeks have resulted in a solution for 2019," said EU Commission Vice President Valdis Dombrovskis at a news conference in Brussels.
"Let's be clear: the solution is not ideal. But it avoids opening the excessive deficit procedure at this stage," he added, referring to a process that can result in major fines for a member country.
In the deal, Italy has accepted to back down on both of its landmark measures, and was now committed to not adding to its colossal two-trillion euro debt load next year.
To win the compromise, Brussels in return offered some flexibility in calculating the budget in light of "exceptional circumstances", including modernising infrastructure after a tragic bridge collapse in Genoa last August.
"Basically, this agreement is a victory for dialogue over confrontation," said European Economic Affairs Commissioner Pierre Moscovici.
The EU and Italy negotiated intensely with both sides worried that a protracted feud would alarm the markets and ignite a debt crisis in the eurozone's third biggest economy.
The situation grew more complicated politically after France last week announced a new wave of spending for 2019 that will also break EU rules on public spending.
This came in response to recent "yellow vest" protests across France that has spooked French President Emmanuel Macron away from pro-Brussels belt-tightening ahead of European elections next year.
Italy and others complain that powerful France receives special treatment on its budget plans by the EU Commission.
Without the compromise, Italy would have ultimately faced a fine of up to 0.2 percent of the nation's GDP after a long and rancorous process with its eurozone partners.
The talks centred on the so-called structural deficit, which includes all public spending minus debt payments.
Italy's first budget was set to blow through commitments made by the previous government, with a deterioration to a 0.8 structural deficit. The deal on Wednesday said this would now be balanced.
The overall public sector deficit was set at 2.04 percent of GDP and be based on expected economic growth of 1.0 percent of GDP rather than the 1.5 percent contained in the initial proposal.