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 With a recovery coming to a halt in the second quarter and depressed
prices reflecting near record unemployment, France and Italy want to
shift away from the spending cuts that marked the bloc's response to
the 2009-2012 crisis.
But Germany says debt discipline must continue and the European
Commission, which acts as a budget policeman, has until next
Wednesday to reject 2015 budgets that fail to comply with EU fiscal
rules.
France and Italy are pushing for more spending room in their budgets
in return for new commitments on structural reforms, and officials
say that any changes Paris and Rome make to their budgets are likely
to be small.
Many economists say nothing short of a large scale U.S.-style
bond-buying program will revive the economy that is still suffering
a hangover from the debt and banking crisis.
But European Central Bank President Mario Draghi told euro zone
leaders seated around a large oval table in the EU summit's red
marble building that they could not just rely on the ECB.
"We avoided the collapse of the euro with a joint effort. Now our
focus should be to act jointly again to avoid a relapse into a
recession," Draghi said, according to his spokesman, who quoted from
his speech. "Hope is not a strategy."
He said a coherent plan for economic growth had to involve "concrete
and credible" structural reforms.
Laying out a four-pronged strategy, Draghi emphasized that monetary
policy was only one part of an economic revival plan, the others
being reforms, sound public finances and healing the bloc's sick
banks.
DRAGHI'S MIRROR
Draghi said he wanted to see governments draw up a reform program by
the next EU summit in December.
That appeared to be welcomed by Merkel, who has faced sustained
pressure from France and Italy and to some extent the United States
and the International Monetary Fund, to agree to more government
spending to help the economy.
Merkel told a news conference following the summit that she thanked
Draghi "for holding up a mirror for us once again."
"Monetary policy can do some things, that is the job of the
independent European Central Bank," Merkel said.
"But if fiscal policy doesn't react simultaneously, if we don't
improve our economic policies, our competitiveness and our
investment climate, then we won't come out of this unsatisfactory
situation," Merkel said.
The summit underscored how the euro zone has few quick fixes.
According to people in the room at the summit, Merkel said that a
mix of private investment, fiscal discipline and openness to
fast-growing Asian economies was the way forward.
Incoming European Commission President Jean-Claude Juncker has
promised to unveil a 300-billion euro investment plan by Christmas,
which is likely to focus on transport and energy.
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But such measures could take years to bear fruit, and the United
States and the IMF worry that the bloc, which makes up a fifth of
the world economy, is a drag on global prosperity.
The debate is complicated by EU rules that seek to keep country's
public finances in order and Germany's promise to balance its books
next year for the first time since 1969.
GROWTH POTENTIAL
The EU's top economic official renewed calls on Berlin to act,
saying that without investment the future was bleak for Europe's
biggest economy, even if it is stronger than most.
"All euro area countries have shortages in potential growth,
including Germany," said Jyrki Katainen, the European Commissioner
who will become the bloc's growth tsar from November, tasked with
bringing down near record unemployment and raising investment.
"Germany's potential growth is currently 1.5 (percent). This is far
too low," he told reporters.
France, the euro zone's second biggest economy, is particularly in
the spotlight after conceding it would fail to meet EU debt limits
until 2017, later than initially promised.
French President Francois Hollande told the summit that Europe
should not give the impression that there were "good and bad
students" and promised in principle to meet EU budget rules,
diplomats said.
Italian Prime Minister Matteo Renzi is proposing tax cuts to get
households spending again, as his country is suffering its third
recession since 2008.
However, Dutch Premier Mark Rutte, a Merkel ally, said no investors
would put their money into the euro zone if public finances were out
of control, and said there was a risk of "rapid death" of the
currency area if action were not taken.
Outgoing Commission President Jose Manuel Barroso sounded a
conciliatory note at the end of the summit, saying budget
discussions with France and Italy were to see if there was a
"serious deviation" from EU rules, not whether they had simply been
met.
(Additional reporting by Paul Taylor, Alastair Macdonald,
Jean-Baptiste Vey and Philip Blenkinsop in Brussels and Noah Barkin
and Michelle Martin in Berlin; Editing by Jon Boyle)
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