UPDATE 3-Italy hits resistance to softer European spending rules

Tue Jul 8, 2014 1:17pm EDT

Related Topics

* Dijsselbloem says no exceptions to budget rules

* Italy's Padoan calls for "incentives" for reforms

* Germany's Schaeuble says economic reform alone not enough

* Juncker says spending leeway is limited (Adds news conference after EU ministers' meeting, comment from Juncker)

By John O'Donnell and Francesca Landini

BRUSSELS, July 8 (Reuters) - Italy and its allies will receive no special leeway in meeting EU budget rules, European officials agreed on Tuesday, as Germany resisted attempts to soft-pedal on long-promised spending reforms.

Italy, leading a drive for greater flexibility in the way the rules are applied to encourage economic growth and investment, has the second-highest public debt in the euro zone as a proportion of national output, after Greece.

Italian Prime Minister Mateo Renzi, pressing his campaign for greater fiscal flexibility, said all the money governments invested in broadband networks should be stripped out of the calculation of public deficits.

"Every euro spent in digital infrastructures must be out of the box," Renzi said in English at a conference in Venice.

Italy opened the first finance ministers' meeting of its European Union presidency by calling for "incentives" to reform after years of rigid focus on budget austerity. But Rome faced immediate resistance, including from Germany.

"Italy is delivering reforms and ... my goal is to help every country to find incentives to do reforms," Padoan said.

"If we want to see more investment we need to make the investment environment more friendly."

Padoan chairs meetings of the 28 EU finance ministers, a key forum for any change in the direction of economic policy.

Before the session began, Jeroen Dijsselbloem, head of the 18-nation Eurogroup of ministers from the single currency area, painted Italy's reform effort in an unflattering light and insisted Rome would get no special leeway.

"Competitiveness has to improve and economic growth has to pick up and lots of work needs to be done there," he said.

"Italy has been showing almost zero growth of productivity for many years and that has to improve."

Asked whether any flexibility would be given to Rome to meet its budget targets, Dijsselbloem said: "We don't do flexibility per country, we do flexibility for all of the countries."

In part of the meeting that was broadcast, German Finance Minister Wolfgang Schaeuble cautioned peers against slacking on budgets, saying that structural reforms were no alternative to reining in excess spending or "fiscal consolidation".

The European Commission also quickly pushed back.

"All expenditures must be taken into account when calculating the budget deficit," EU Economic Commissioner Siim Kallas told a news conference after the meeting of ministers.

"Can military expenditures be excluded from deficit calculations? You can imagine what would happen if this would be a possibility. Let's keep the rules," he said.

NO "FLEXIBILITY PACT"

Austrian State Secretary Jochen Danninger voiced similar scepticism. "The existing rules are to be respected to the letter," he told journalists ahead of the meeting.

"Within the framework of these rules, there is enough flexibility, so no weakening of the rules."

Italian ministers have hinted at the possibility that public investments on schools and road and rail infrastructure should also not be counted towards its budget deficit.

They have expressed worry about rules that would require Rome to reduce its overall debt level as the economy, just out of recession, is struggling to grow.

Italy's debt is projected to reach 135 percent of output at the end of the year. Under EU rules, governments have to strive to balance their books and cut public debt to 60 percent of gross domestic product within 20 years.

The ministerial debate took place as Jean-Claude Juncker, the designated president of the European Commission, began meeting political groups in the European Parliament to outline his policy programme.

The debate about whether to let governments loosen their purse strings or make them stick to austerity played a big part in his questioning by lawmakers, participants said.

In his first meeting with the Socialist group, Juncker conceded that there had been "weaknesses on the social side" in the rescue of the euro currency during the financial crisis.

He emerged from the meeting saying that a centre-left Social Democrat would probably take the powerful post of EU economic and monetary affairs commissioner, which oversees euro zone national budgets. The post has been held by centre-right liberal Olli Rehn since 2009.

The former Luxembourg prime minister and Eurogroup chairman, who has put measures to encourage growth at the centre of his agenda, is sympathetic to anti-austerity arguments.

Nonetheless, he believes there are limits to the budget leeway that can be granted and the rules should not be altered.

"The stability pact will not become the flexibility pact," he told Social Democrats, referring to the EU budget rules, according to one person present at the meeting.

"We cannot spend the money we don't have," he later told liberal lawmakers in the European Parliament. "Those who want me to say that tight fiscal discipline is over, are wrong."

Supported by the main pro-European centre-right, centre-left and liberal groups, Juncker is expected to win approval from the EU legislature in a vote on July 16.

EU leaders nominated him last month despite opposition from Britain, which depicted him as an old-guard federalist and Brussels insider, unsuited to the task of shaking up the executive body which proposes and enforces EU laws. (Additional reporting by Robin Emmott, Jan Strupczewski and Martin Santa; Editing by Paul Taylor and Andrew Roche)

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