German Chancellor Angela Merkel will have to perform a wily balancing act at tonight’s summit of European leaders — showing her sympathy for the new growth initiatives that will be raised, while insisting that debt-strapped countries have no choice but to continue to cut their deficits.

Merkel gave a preview of her position in Berlin overnight, expressing surprise that the commonsense notion of balancing one’s budget had proved so controversial.

According to Merkel, the current debate “sometimes gives the impression that for us, making savings is a pleasure in itself”. But, she added, “it’s simply a question of not spending more than one collects. All the same, it’s astonishing that something so simple leads to such debates.”

Merkel went on to repeat her line that growth and budgetary discipline were not contradictory ideas, and that it was necessary to “tackle the two in the same way”.

But it remains to be seen whether Merkel’s reassuring rhetoric will be enough to deflect the growing anger from countries such as Italy and Spain, which blame Berlin’s austerity policies for pushing their economies deeper into recession.

French president François Hollande has latched onto this growing anti-austerity sentiment in the southern eurozone countries. At tonight’s summit, he’ll outline a range of initiatives aimed at boosting growth in the eurozone. Hollande will push for the creation of “eurobonds” — bonds that are guaranteed by all eurozone countries — which would allow countries such as Spain and Italy to pay lower interest rates on their borrowings.

He also wants to give the eurozone’s bailout fund a banking licence, which would allow it to borrow directly from the European Central Bank and greatly increase its current €500 billion ($640 billion) firepower.

He’s also likely to back Madrid’s suggestion that the bailout fund be allowed to lend directly to troubled banks. At present, the bailout fund can only provide money to recapitalise banks if the country concerned engages in a full-scale bailout program.

The issue is a burning one for Madrid, which is desperate to avoid a full-scale bailout, but which is grappling with major problems in its banking sector. The Spanish government of Mariano Rajoy has appointed the two private-sector firms, BlackRock and Oliver Wyman, to conduct a definitive audit of its banks and to determine the level of their problem loans. In addition, Goldman Sachs has been appointed to conduct an independent evaluation of the troubled Spanish bank, Bankia, which has already been part nationalised.

The results are likely to be deeply disturbing. On Monday, the Washington-based Institute of International Finance estimated that the losses of the Spanish banks could reach €260 billion, and that they could need up to €60 billion in government assistance.

Merkel, of course, is implacably opposed to all three of Hollande’s growth initiatives. She believes that if countries such as Italy and Spain are able to lower their borrowing costs by issuing eurobonds, it will reduce the pressure on them to clean up their budgets. She’s afraid that Germany’s potential liabilities will soar if the eurozone’s bailout fund is granted a banking licence, and she suspects that if the fund is allowed to recapitalise banks directly, countries will have less incentive to reform their financial sectors. What’s more, the bailout fund will be left holding stakes in troubled banks, which would be difficult to manage.

But she knows that it’s important for her to be seen to be making some concessions to Hollande’s demands.

As a result, tonight’s meeting will result in a modest package of growth initiatives. The European Investment Bank’s capital will be boosted by €10 billion, and €230 million in unused funds will be used to create guarantees for newly created “Project Bonds”. The hope is that private investors, such as pension funds and insurance companies, will buy about €4.5 billion of these new bonds, and that the money raised will be used to fund five or six major infrastructure projects.

But these extremely small concessions are unlikely to placate Hollande, or convince leaders of the debt-laden southern eurozone countries that Berlin is listening to their complaints. As a result, their hostility towards German-backed austerity, and the smooth-talking German Chancellor, is bound to increase.

*This article was first published at Business Spectator