France admitted on Sunday that keeping its top-notch credit rating would be a stretch without some tough budget decisions, following German hints that Berlin may resort to raising taxes to help bring down its deficit.
Euro zone trade unions are preparing for possible confrontations in the coming week if governments impose austerity measures or labor reforms unilaterally.
But ministers made clear they were ready to take unpopular steps to prevent the Greek debt crisis spreading to their economies, although doubts are growing about whether the Spanish government in particular has enough support to get its way.
Budget Minister Francois Baroin indicated on Sunday that France should not take for granted its AAA rating, which allows Paris to borrow relatively cheaply on international markets and finance its big budget deficit.
The objective of keeping the AAA rating is an objective that is a stretch, and it is an objective that, in fact, partly informs the economic policies we want to have, Baroin said.
We must maintain our AAA rating, reduce our debt to avoid being too dependent on the markets, and we must do this for the long term, he told Canal+ TV in an interview.
Baroin later clarified that the target was a demanding (objective) which we're committed to.
France has forecast its deficit will hit 8 percent of gross domestic product this year, but aims to bring it down to within the European Union's 3 percent limit by 2013.
Talks are under way on pension reform and Paris has frozen central government spending, barring pensions and interest payments, between 2011 and 2013. It is also considering a constitutional amendment to set binding budget deficit limits.
Berlin's budget problems are less severe but Finance Minister Wolfgang Schaeuble signaled at the weekend that Germans may have to stomach tax rises as well as spending cuts.
Chancellor Angela Merkel's government is considering raising value-added tax (VAT) to the full rate of 19 percent on certain items that currently benefit from a lower rate of 7 percent, coalition sources told Reuters on Friday.
If you abolish tax breaks, some will say that's a tax increase. At the end of the day, it's about having a sensible and balanced policy, Schaeuble told the Bild am Sonntag paper.
And let's bear in mind that cuts on social spending hit those in the country with less money.
Germany's budget deficit is expected to exceed five percent of GDP in 2010, modest by current EU standards but well above the bloc's limit.
While France expressed its determination to hold on to its top-notch rating, Fitch on Friday became the second agency to strip Spain of its triple-A, sending markets reeling.
Spain's Socialist government is battling to prove to nervous markets that the euro zone's fourth largest economy will not go down the same path as Greece. But with political opposition growing at home, its ability to push through reforms is limited.
Weekend opinion polls put Prime Minister Jose Luis Rodriguez Zapatero's government far behind the opposition, and indicated that many voters believe he will have to call early elections as support for a 2011 austerity budget will be hard to muster.
The government faces not only an economic crisis but a political crisis too, because the way it's governing is not good enough, said Angel Laborda, an economist at Spanish savings banks consultancy FUNCAS. I believe that early elections will be called, sooner or later.
A deadline for the government, trade unions and business to agree on labor reforms, aiming to cut unemployment and make the Spanish economy more competitive, looms in the coming week.
Already a May 31 deadline has been pushed back a week. If the talks fail, the government says it will propose its own changes by June 11, risking a confrontation with the unions.
PREPARING THE DEFENCES
The unions, traditionally close to the Socialists, have said they will respond to any imposed reform with a general strike.
Unions across the continent are preparing their defenses. The European Trade Union Confederation will consider its response to austerity measures in Brussels on June 1 and 2.
But Italy's largest trade union already aims to force Rome to modify its austerity budget with a national strike, probably on June 25.
Europe's debt crisis began in Greece, after Athens revealed last year that its budget deficit was far higher than first reported. Investors reacted by dumping Greek government bonds, fearing Athens would default on its debt repayments.
But Finance Minister George Papaconstantinou promised that Greece would not restructure its debt.
Debt restructuring would be disastrous for the country's credibility. It would lead to its marginalization from capital markets, to even more belt-tightening and a very deep recession, he told Sunday's Eleftherotypia newspaper.
Greece has agreed to drastic belt-tightening under a 110 billion euro ($134 billion) bailout organized by the EU and IMF.
(Reporting by Helen Massy-Beresford and Jean-Baptiste Vey in Paris, Paul Day in Madrid, Dave Graham In Berlin, Francesca Piscioneri and Gavin Jones in Rome, and George Georgiopoulos in Athens)