UPDATE 1-EU's Rehn urges euro debtors to keep mending finances

Thu Feb 28, 2013 12:14pm EST

By Marc Jones and Christina Fincher

LONDON Feb 28 (Reuters) - EU Economic and Monetary Affairs Commissioner Olli Rehn urged the euro zone's big debtors on Thursday to keep repairing their finances, saying they could not afford the 'luxury' of spending to boost their economies.

He backed Italy to find a way out of its political deadlock, and called for countries to stick with careful but steady fiscal consolidation.

Italy's inconclusive elections have raised fears of prolonged instability and damage to the country's efforts to contain its debt burden.

Rehn acknowledged that the election had resulted in a "complex" outcome but played down fears that political wrangling would stall economic reform.

"We have confidence in the Italian institutions and in the ability of President Napolitano to swiftly charter a way forward," Rehn said in speech at an event organised by think-tank Policy Network.

Emphasising that he was not singling out Italy, Rehn warned that the European Commission's 2014 euro zone growth forecast of 1.4 percent was dependent on there not being any "political accidents".

Debt-strained countries also had no alternative but to stick to repairing their finances, he said.

"These countries do not have this luxury (of turning to stimulus)," he said. "Consolidation needs to proceed at a careful but steady pace".

Italian bond yields suffered their biggest one-day jump in over half a year following the indecisive election result, implying higher borrowing costs.

Investors fear the strength of the vote for anti-austerity parties in Italy could weaken efforts to reform public finances and labour laws and damage the euro zone's efforts to resolve its three-year old debt crisis.

UK MIDFIELD ROLE

Rehn also urged Britain to remain in the EU, saying it was in British interests to reform Europe rather than exit the bloc.

"If I were a British citizen, I would like my country to be in the heart of the midfield ... No one has ever scored a goal sitting on the bench."

On the euro zone, he called for the bloc's stronger members to encourage spending within their economies, a move he said would in turn help weaker countries.

He urged the region's economic powerhouse, Germany, to open up its services sector and also stressed that Europe needed to complete the process of shoring up the region's weak banks.

Asked whether newly announced plans to ban bankers from being paid bonuses bigger than their basic pay would drive financial firms out of Europe, and in particular London, Rehn played down the threat.

"We are now working on legislation and we do it in line with international guidelines. We do not believe this will lead to any erosion of the (influence of the) City of London," he told reporters after the speech.

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