The commission had demanded Italy reduce its proposed deficit target due to the country’s high debt.
Italy initially refused to back down and change its budget, leading EU officials to threaten disciplinary action and financial consequences.
However, the compromise made on Wednesday means no such action will be necessary.
Italian Prime Minister Giuseppe Conte announced the government has agreed to reduce the deficit target to 2.04 per cent of GDP from 2.4 per cent.
The country’s coalition government managed to reduce the target without making drastic changes to key budget proposals including a universal basic income and lowering the retirement age.
“Over the last few weeks we worked to bring the positions closer without ever moving backwards with respect to the objectives the Italian people set us in the March 4 election,” Conte said.
Conte added that the deal was a victory for both Rome and Brussels.
“We can say in conscience that we have realised in full the wishes of our citizens, demonstrating determination in the economic politics of the government,” he told the country’s senate.
“We have achieved by means of a complete sense of responsibility, a shared solution, that is good for Italians and satisfactory to Europe.”
European Economic Commissioner Pierre Moscovici said that while the reduction was less than what was hoped for, he understands Italy has had difficult year, from the collapse of the Morandi bridge in August and the widespread damage caused by incessant wild weather.
“The agreement reached today shows unambiguously that the European Commission is not the enemy of the Italian people,” he said.
“We are not a machine made up of insensitive bureaucrats, imposing austerity and denying democracy. I hope that today we can move beyond such caricatures.
“I hope that today we can also put to rest any doubts over Italy’s place in Europe.”
The Italian parliament now needs to approve the new budget.
The European Commission said it would closely monitor whether Italy adheres to the deal.
