France, Italy eye costly rail link despite EU budget row

France's President Francois Hollande (R) and Italy's Prime Minister Mario Monti attend a joint news conference during a Franco-Italian summit in Lyon, December 3, 2012.

LYON, France (Reuters) - The leaders of France and Italy pledged on Monday to push ahead with a high-speed rail link between Lyon and Turin despite a row over EU spending.

With Britain leading calls to slash billions of euros from the European Union's 2014-2020 budget, French President Francois Hollande defended the rail link between southeast France and northwest Italy as essential to economic competitiveness.

Italy is the second-largest market for French goods and the third-biggest importer to France but the Frejus rail tunnel linking the countries in the Alps was built in the 19th century. It is too steeply sloped to be efficient for heavy rail cargo.

Hollande, an advocate of infrastructure spending to counter recession, acknowledged that the rail project - under discussion for 11 years - relied on EU funds. He and Italian Prime Minister Mario defended it on economic grounds.

"We are in firm agreement to push ahead with European projects, of which the Lyon-Turin link is one," Hollande told a joint news conference. "But a lot will depend on the European budget."

The French Socialist leader remained vague on the deadline for the link's completion and its total cost, which has been estimated at up to 25 billion euros ($33 billion).

He said the European Commission had agreed to pay 50 percent of the initial planning phase but France and Italy were seeking EU funds for 40 percent of the construction bill. Excavating the tunnels alone would cost some 8.5 billion euros, he said.

France's state auditor, the Court des Comptes, voiced concern in July that the project would undermine national efforts to comply with EU budget deficit rules. It estimated a price tag of 11 billion euros for France alone.

An EU summit last month failed to agree a new 7-year budget after calls for cuts to the 1-trillion-euro spending plan.

Environmentalists and residents oppose the rail link, which would cut the travelling time from Paris to Milan to four hours from seven, and it has sparked violent protests. Hollande said the link would cut carbon dioxide emissions by switching freight from trucks to trains. ($1 = 0.7689 euros)

(Reporting by Elizabeth Pineau; Editing by Ruth Pitchford)