ECONOMY

Merkel says won’t let up on fiscal discipline for euro area

German Chancellor Angela Merkel said she won’t stop pressing euro-area governments to comply with debt and deficit rules because Europe’s credibility is at stake.

Merkel’s comments were a nudge to countries such as France and Italy as the euro region’s two biggest economies after Germany seek to revive growth. She spoke on the anniversary of German reunification in 1990, which ended Europe’s Cold War division and eventually led to the currency union.

“I know it somehow sounds petty when I demand this again and again,” Merkel said to applause at a German Unity Day ceremony in Hanover on Friday. “And yet I won’t let up, because our actions say something about how serious we are about our principles, assuming we expect others to take us seriously, economically and politically.”

With the economy stalled, France’s budget deficit is forecast to widen in 2014 for the first time in five years and barely change in 2015. Italian Prime Minister Matteo Renzi’s government has cut the growth forecast for this year and pushed back its structurally-balanced budget target by a year as the economy remains in recession.

Merkel, who championed austerity policies during the euro- area debt crisis that began in Greece, has set Europe’s biggest economy on track for a balanced budget next year. German policy makers have kept up pressure on France, Germany’s main partner in Europe since World War II, to fix its finances.

“We in Europe have to abide by the principles and treaties we have given ourselves,” including the stability and growth pact governing the European Union, Merkel said on Friday.

The euro area is headed for “a new showdown between Italy and France on the one side and Germany plus some fiscal hardliners on the other side,” Carsten Brzeski, chief economist at ING-DiBa in Frankfurt, said on his blog on Friday. The most likely outcome will be “a bit of more accommodative fiscal policies, without letting austerity disappear,” he said.

[Bloomberg]