EU Tackles Rule-Breaking France, Italy on Budget

The European Commission was set to unveil a hard-eyed assessment of eurozone economies on Friday, with special attention on overspending France and Italy that risk sanctions by Brussels.

The Commission, the EU's executive branch, delivers official opinions on euro government budget plans under new powers given to Brussels during the eurozone debt crisis.

But according to sources, the EU will give France and Italy, as well as Spain, until next spring to implement tough reforms, delaying a harsh verdict on national overspending amid global calls that Brussels ease up on austerity.

Fears are growing that the state of the economy in the 18-nation eurozone could spread to other parts of the world, with the bloc caught in a slump of near-zero growth, near-deflation and high unemployment.

Acknowledging the concern, the Commission will offer their assessment of the draft budget for next year, but delay tough demands for changes for now.

The Commission's tolerance, expected in an announcement at 1000 GMT Friday, risks angering an impatient Germany, frustrated with the slow pace of reform in Paris and Rome.

But the international call for the EU to step away from austerity is growing.

The OECD on Tuesday urged more flexibility in fiscal rules for struggling EU members like France and Italy in order to prevent another recession.

- France 'non-compliant' -

Last month, France and Italy barely avoided having their budgets humiliatingly sent back for serious breaches. France is set for a deficit of 4.3 percent of GDP in 2015, way above the EU ceiling of three percent.

Expectations were that the Commission would order urgent action in detailed opinions Friday, especially with France having already won several delays to meet EU deficit rules.

But in a change of strategy, it will now only give an initial "opinion" without delving into next steps, an EU official said.

These opinions are to "engage a conversation" before deciding a plan of action delivered in May or June.

According to the plans, the Commission will this week divide eurozone countries into groups, with France and Italy, but also Spain and Portugal, identified as non-compliant of the EU's budgetary rules.

But instead of launching a procedure to sanction the rule-breakers, the new Commission, led by Luxembourg's Jean Claude Juncker, will give the countries more time to modify their budgets for 2015.

It is only at this point that the rule breakers could face penalties under the EU's new powers.

The extra time puts pressure on the embattled government of French President Francois Hollande to implement tough reforms that have only been announced for now.

Last week, Hollande's pro-reform Prime Minister Manuel Valls and Italy's Matteo Renzi sent letters to Brussels officials reiterating their governments' commitment to reform.

It was these letters that won the few months of reprieve, another European source said.

- Deep divisions -

In Brussels, deep divisions have emerged over how to handle the Paris government's failure to meet its commitments.

Germany's Commissioner Guenther Oettinger roundly criticized France for breaking the rules and failing to bring in reforms.

"It would not be credible to extend the deadline without asking for very clear, concrete steps in return," said Oettinger, who is a close ally of austerity-touting German Chancellor Angela Merkel.

The OECD, which provides economic advice to its 34 industrialized members, on Tuesday recommended fiscal leniency for France and Italy.

France and Italy's "slower pace of structural fiscal adjustment... proposed in their 2015 budget plans seems appropriate," the OECD said.

French Finance Minister Michel Sapin welcomed the OECD's analysis.

"The IMF supports our approach, the OECD supports our approach. We now need the European Commission to be in line with it," Sapin said.