(Bloomberg) -- The European Commission decided against launching a disciplinary procedure against Italy over its budget after the country’s populist government pledged to rein in its spending.

Following a meeting of its top officials, the commission, the EU’s executive arm, concluded that concessions by Italy on its budget meant the country didn’t warrant triggering the so-called excessive deficit procedure.

“Intensive negotiations over the last few weeks have resulted in a solution for 2019,” Commission Vice President Valdis Dombrovskis told reporters in Brussels on Wednesday. “Lets be clear, the solution is not ideal but it avoids opening the excessive deficit procedure at this stage and it corrects the situation of serious non-compliance.”

The decision comes after weeks of negotiations between Italian and EU officials and caps a months-long tussle with Brussels that roiled markets. It also marks a climbdown for the country’s firebrand populist leaders, who rose to power with expensive election promises including a lower retirement age and more welfare benefits.

Markets Rally

Italian 10-year bond yields fell as much as 18 basis points to 2.75 percent, the lowest level in over three months, following the first reports of a technical agreement between the two sides. The spread over those on their German peers dropped to 257 basis points as of 11:10 a.m. in London, while the FTSE MIB index of shares rallied 1.6 percent with banking stocks leading gains.

As part of the deal, Italy cut its deficit target for next year to 2.04 percent of gross domestic product and shaved about 4 billion euros ($4.6 billion) off its spending plans. Rome’s initial plan for a deficit of 2.4 percent was rejected by officials in Brussels because it was in breach of the EU’s budget rules, while analysis by the commission last month suggested that the deficit would actually be close to 3 percent.

While far from what the EU had hoped, the deal is a relief for EU officials, who had fretted for months over the possible impact a prolonged budget standoff could have on the country’s finances and the euro-area economy.

Discussions were further complicated by measures taken by the French government to calm the Yellow Vest protests, which will likely push the country’s budget deficit over EU limit next year. The move by France gave rise to complaints from Rome that Paris gets special treatment when it comes to its budget.

(Updates with EU comment in the third paragraph.)

To contact the reporters on this story: Nikos Chrysoloras in Brussels at nchrysoloras@bloomberg.net;Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net

To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, ;Rosalind Mathieson at rmathieson3@bloomberg.net, Richard Bravo

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