Yields on Italian government bonds fell on Wednesday morning as the euro climbed following reports that Italy’s ruling coalition might be open to reviewing its budget plan. Though the Italian government swiftly denied the reports about being open to changes in its plan, the moves in the euro and yields persisted, as analysts said they didn’t appear to be news driven.

The spread between the 10-year BTP and 10-year German bund tightened to tightening as much as 16 basis points to 309 basis points.

Italian bank shares also eased off their highs of the session after the denials, but remained 2% higher on the day after sinking to two-year lows on Tuesday.

And in other signs that the confrontation between Italy and Europe is heading toward a precipice, the European Union confirmed Wednesday morning that it would officially reject Italy’s budget plan, an unprecedented move that will likely lead to billions of euros in fines being levied against Rome for violating the bloc’s budget rules.

The Italian government calls for an expansion of the country’s budget deficit to 2.4% of GDP to finance tax cuts, expanded pension benefits and other handouts to unemployed and desperate Italians.

“Our analysis today suggests that the debt doesn’t respect our budget rules. We conclude that opening a proceeding against excessive spending based n the debt is then justified,” the EU said, according to ANSA.

The Italian plan represents a “particularly grave disrespect” of EU budget rules, particularly the recommendation from the meeting of EU ecofin ministers last July 13. The statement confirms Brussels’ previous analysis.

European Commission Vice President Valdis Dombrovskis said Italy’s aggressive spending would eventually have a negative impact on growth.

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