France and Italy were reprimanded by the European Union for running big deficits, the first stage in a confrontation that will test the bloc’s resolve and could in theory prompt billions of euros in fines.

The announcement by the European Commission on Wednesday is all the more consequential with French legislative elections looming that have rattled investors on the prospect that a winner from either the far-right or the left will only further bloat the country’s public finances.

In total, seven nations newly face censure by officials for running budget shortfalls above the bloc’s 3% limit, leaving them subject to the bloc’s so-called Excessive Deficit Procedure that requires remedial action and can lead to fines for non compliance.

“Fiscal sustainability challenges are low in all EU member states in the short term, while being elevated in the medium and long term in several countries, due to projected high and/or increasing debt ratios in some member states,” the commission said.

Of the countries listed, France and Italy draw the most attention because of their sheer size as the euro zone’s second- and third-biggest economies respectively, each with debts noticeably in excess of 100% of gross domestic product. Romania was already facing a reprimand, and other nations joining it now are Belgium, Hungary, Malta, Poland and Slovakia.

In France, the move raises the stakes for whoever wins the snap election called by President Emmanuel Macron that will take place within the next three weeks. His party is currently in third place, while the far-right National Rally and the leftist alliance vying for office have signaled a more aggressive stance to Brussels.

An all-out dispute would have disquieting parallels with the euro-zone debt crisis, when the currency’s integrity was threatened as investors panicked over standoffs between EU institutions and heavily indebted European governments such as Greece.

Macron’s election announcement already inspired echoes of that turmoil, with the spread between French and German bonds widening as a result, and ripple effects seen with Italy and other nations in the region.

The yield premium investors demand to hold 10-year French debt over German notes remained two basis points higher at 79 basis points, the most since 2017, after the release of the report.

The spread has climbed 32 basis points since Macron called for snap elections, sending markets into a tailspin. Some investors say the gap could eventually reach 100 basis points, a level last seen when the euro-zone sovereign debt crisis was in full swing

The European Central Bank - an institution which could find itself at the front line of any crisis fighting - added its own voice of concern on Wednesday with a report calling on euro-area members to start cutting debt immediately in the face of enormous long-term fiscal risks from aging populations, defense spending and climate change.

The commission’s announcement is the culmination of years of recalibrating the bloc’s debt and deficit regime. The revamped rules could allow for greater enforcement through fines, in contrast to a system of sanctions that was never previously activated.

The next stage will be the delivery of medium-term plans by countries by Sept. 20 that commit to a ceiling for net spending growth for the next four years, followed by assessments of them by the commission in November stipulating a fiscal path to follow to balance their books.

The regime, known as the Stability and Growth Pact, was suspended for the duration of the pandemic to permit largescale support spending, which was then followed by support measures during the recent cost of living crisis.

The fiscal damage is still being felt. In France, debt is projected by Brussels to keep rising and reach close to 114% of output next year. Last month, S&P Global Ratings downgraded the country, highlighting missed goals in the government’s deficit-reduction plans.

Italy’s debt ratio, which fell last year to 137%, is now increasing again too, putting the country on course to surpass Greece with the region’s biggest pile of borrowings within three years, according to Scope Ratings.

In contrast to Macron, whose party was trounced in the European Parliament elections earlier this month, Italian Prime Minister Giorgia Meloni is currently riding high, controlling a strong majority and politically bolstered by her own victory in that region-wide vote.

But the government in Rome is lumbered with a particularly onerous legacy from the pandemic, which hit the country before many others and then inspired a home-renovation measure called superbonus that is set to haunt its public finances for years to come.

The EU’s warning will inevitably lead to a dilemma for Meloni, as she weighs whether to bow to Brussels and abandon campaign promises including an expensive tax cut on wages that would set her back by about €10 billion euros ($10.7 billion). That could cause cracks in her coalition, particularly from rival and League leader Matteo Salvini.

The commission’s announcement granted a reprieve to Spain, Estonia and the Czech Republic, whose deficits exceeded the bloc’s 3% limit last year.

In the case of Spain, the euro zone’s fourth-biggest economy, its debt exceeds 100% of output but is now on a downward trajectory, in contrast to the situations in France and Italy.

Romania was already subject to an Excessive Deficit Procedure. Officials criticized the country’s lack of action to fix its fiscal and economic situation. One, speaking on condition of anonymity, observed its failure to act as “extremely worrying.”

  - Bloomberg