UPDATE 1-EU leaders agree to apply fiscal rules as flexibly as possible -draft

KORTRIJK, Belgium, June 26 Thu Jun 26, 2014 9:24am EDT

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KORTRIJK, Belgium, June 26 (Reuters) - European Union leaders will agree on Friday to apply EU fiscal rules as flexibly as possible to support economic growth, taking structural reforms into account when assessing budget discipline, draft summit conclusions showed.

The agreement marks a success for Italian Prime Minister Matteo Renzi, who has been pushing for a more lenient interpretation of the bloc's budget rules since he took office in February.

Without faster economic growth, Italy won't be able reduce its huge public debt.

The fiscal rules enshrined in the EU's Stability and Growth Pact say governments must limit their budget deficits to 3 percent of gross domestic product and keep public debt to 60 percent of GDP to help underpin the euro currency.

The Pact also spells out how governments have to put their finances in order if they exceed the limits and when they can be granted leeway - a key issue for slow-growing, highly indebted countries like Italy and France.

"The possibilities offered by the EU's existing fiscal framework to balance fiscal discipline with the need to support growth should be used," draft conclusions of the EU summit that will take place on Friday showed.

There will be no change to the EU fiscal rules, which have been revised three times already since they were set up in 1997.

But the leaders' agreement is a strong signal for the next European Commission, starting on Nov. 1, on how European governments want the current, complex rules to be enforced.

The Commission, which is the EU's executive arm and the guardian of EU law, is to prepare a report by Dec. 14 on how to apply the fiscal rules.

FLEXIBILITY

"Given the persistently high debt and unemployment levels, as well as the challenges of an ageing society and of supporting job creation, particularly for the young, fiscal consolidation must continue in a growth-friendly and differentiated manner," the draft of conclusions seen by Reuters said.

The leaders put special emphasis on structural reforms, which should win governments more leniency in the assessment of their budget discipline.

"Structural reforms that enhance growth and improve fiscal sustainability should be promoted, including through a more integrated assessment of fiscal measures and structural reforms," the leaders said in the draft conclusions.

This could mean that countries like Italy, which is required by EU law to target a structural budget balance, could be granted more time to do so if it undertakes structural reforms that would help growth in the long run.

Government investment may also be excluded from budget deficit calculations for countries which have deficits equivalent to less than 3 percent of GDP and which are cutting debt.

EU policymakers believe that applying the EU fiscal rules strictly over the last four years of the sovereign debt crisis was key to winning back market confidence in European public finances.

But with market confidence returning, governments now desperately need their economies to grow to help them work down the huge debts they built up during the crisis. (Editing by Hugh Lawson)

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