Merkel calls for stable euro zone budgets in warning shot to Italy

BERLIN (Reuters) - Euro zone countries must each ensure their budgets are stable and economies competitive, German Chancellor Angela Merkel said ahead of a European Union summit on Wednesday, as Italy weighs expansionary budget plans that risk EU rejection.

Italy, the euro zone's third largest economy, has prepared an expansionary 2019 budget that sets up a showdown with authorities in Brussels over compliance with EU rules. The European Commission may reject the plans.

Merkel told the Bundestag lower house of parliament in Berlin that all members of the euro zone were responsible for their own economic and budget policy.

"Each state in the euro zone is obliged to take care of stability and to take necessary reforms for its competitiveness - and that applies now in good economic times," she added.

"At the same time, as we have learned from painful experience, in a currency union we are so closely intertwined with one another that national policies can always have effects on the other member states."

She said stable budgets were an important condition for good economic development in each individual country, adding: "Solid public finances are also a condition for trust in the currency union."

"Our guide remains the Stability and Growth Pact. I will continue to make the case that in Europe this principle applies: responsibility and solidarity, liability and control - those are two sides of the same coin," she added to laud applause.

(Reporting by Madeline Chambers; Writing by Paul Carrel; Editing by Michelle Martin)