Germany may come under renewed pressure to switch from savings to investment, while France and Italy will again be confronted with the gap between their economic strategies and the currency bloc’s rules on fiscal discipline. On both ends of the debate, nations are likely to resist change to their own budget plans while calling on their neighbors to do more.

German Chancellor Angela Merkel has said that consolidating government budgets is the only way to “master the crisis permanently,” which limits the amount of available leeway. Italy counters that it needs room to limit the pain inflicted by the changes with the most long-term benefits.

As a result, the budget rules put nations under pressure to either limp along under current policy or go to battle over how to ease the short-term impact on voters, said Guntram Wolff, director of the Bruegel research group in Brussels.

“Someone in Germany would typically say if you don’t have pressure on the fiscal side, you’re never going to do the reforms,” Wolff said.“Italians would say, we have our back against the wall, we can’t pass any reforms because we can’t bail out the losers of those reforms.”

Five Countries

The Brussels-based commission has so far postponed holding countries’ feet to the fire on the euro-area budget rules, finding in October that no nation was at risk of breaking EU budget rules by a big enough margin to warrant immediate action. The move gave France and Italy more time to win approval for their draft spending plans, ahead of a Nov. 30 deadline for final opinions.

France and Italy, the euro area’s second- and third-largest economies, were among five countries the commission in October asked for more information about 2015 spending plans. Along with Austria, Malta and Slovenia, the nations have offered plans for future spending cuts and other economic measures designed to keep penalties at bay.

Countries in the euro bloc are obliged to bring their deficits to within 3 percent of gross domestic product and reduce debt to below 60 percent. France and Italy want a more flexible approach to take into account growth that’s bleaker than previously forecast, which they say makes the task of meeting the EU’s deadlines more difficult.

Ten-year bond yields from France to Italy dropped today amid speculation the European Central Bank will buy sovereign debt to stimulate the euro-area economy.

Extra Time

In past years, the EU has granted extra time when sought and has avoided confronting how to punish countries that repeatedly don’t meet the targets. France was given two extra years -- until 2015 -- to meet the 3 percent goal. Latest forecasts see the country not achieving that until 2017.

EU rules allow the commission to impose tougher monitoring and even financial payments, if conditions warrant.

“Any extension of the deadline by which France must correct its excessive deficit and comply with the stability pact is acceptable only if Paris makes a clear and credible commitment to reform,” EU Digital Technology Commissioner Guenther Oettinger, a member of Merkel’s Christian Democrats, wrote in the Financial Times on Nov. 21. “Yes, some steps have already been taken. But these have been too few and not sufficiently ambitious. More is needed.”

Upfront Changes

Piling up debt over the past 15 years hasn’t sent Italian growth soaring, said Marco Annunziata, General Electric Co. (GE) chief economist. He said countries may deserve extra time if they propose major upfront changes, rather than squeaking under the EU targets and putting off reckoning with built-in limits on their economies.

“The problem has aways been that countries have interpreted the 3 percent as, ok you should have a 3 percent budget deficit when you’re booming and everything is well,” Annunziata said. “And then unsurprisingly when you go into recession you get in trouble.”

(Published by – November 24, 2014)