UPDATE 1-Austrian conservatives pick Schelling as finance minister
* Schelling replaces predecessor who quit in tax reform row
* OVP picks reformist politician with business background (Recasts with party confirmation, adds details and background)
VIENNA, Aug 31 (Reuters) - Austria's conservative People's Party (OVP) on Sunday chose as finance minister Hans Joerg Schelling, a politically connected millionaire lauded by supporters for whipping the social security network into shape.
The OVP, the junior partner in a government coalition with the Social Democrats, said the party leadership unanimously picked Schelling, 60, head of the national social security system, to replace Michael Spindelegger, who quit last week in a row over tax reform.
The government shake-up in the wealthy euro zone member comes as French President Francois Hollande revamps his government after a similar political row over how to boost a flagging economy without deepening the budget deficit.
As well as pushing through efficiency reforms in the social security system that have turned deficits into surpluses, Schelling has modernised the influential business lobby the Economic Chamber as its deputy head.
That track record helped get him the post of chairman of the ailing Volksbanken AG after its state rescue in 2012, his first job in banking.
Colleagues say his experience leading two big home furnishing chains give him the real-world business nous to handle being Austria's fourth finance minister since 2011.
Schelling says he does not shy from confrontation. Asked in a recent interview why Austrian politicians lack reform zeal, he said: "Fear of losing power, fear of unpopular decisions and fear of being unloved. I have none of all three."
The new OVP leader and vice-chancellor, Reinhold Mitterlehner, the economy minister, had said he would prefer not to serve as finance minister as well, a tricky dual role that Spindelegger had performed.
Spindelegger resigned on Tuesday, accusing party colleagues of disloyalty for questioning his refusal to cut income tax unless the government could do so without raising other levies, putting him at odds with the Social Democrats and members of his own party who favour stimulus over austerity.
Mitterlehner has said his stance would not be very different, but added he was open to talks that would break what he called a damaging stalemate hampering the cabinet's work.
His apparent openness to negotiation may boost prospects for a deal on policies to boost a flagging economy, but would require a tricky balancing act to accommodate OVP fiscal hawks.
Schelling now gets to tackle a host of challenges.
The budget deficit is projected to rise to 2.7 percent of gross domestic product this year and debt to nearly 80 percent of GDP thanks to the costs of winding down stricken nationalised lender Hypo Alpe Adria.
The economy, which grew just 0.2 percent in the second quarter, is struggling. The central bank last week cut its forecast for 2014 GDP growth to 0.9 percent from 1.6 percent.
The government faces lawsuits from debt holders over its decision to wipe out 890 million euros worth of subordinated debt guaranteed by Hypo's home province of Carinthia and to seize 800 million euros from former Hypo owner BayernLB to help finance the wind-down.
Schelling's role as Volksbanken chairman make him uniquely placed to understand the challenge the bank faces as major euro zone banks undergo stress tests. The partly nationalised lender is likely to need more capital, sources close to the matter have told Reuters. (Editing by Robin Pomeroy)
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