* More budget leeway key for Italy's support for Juncker
* EU budget rules already contain needed flexibility
* Germany supports Italy's push for more room for budget
* EU deal with Italy would be blow for Cameron
(Recasts with German, Italian comments, background)
By Francesco Guarascio and James Mackenzie
BRUSSELS/ROME June 17 The European Union,
supported by Germany, is working to meet an Italian demand to
shift focus from austerity towards growth, in a deal that could
help cement Jean-Claude Juncker as the next European Commission
Italy's priority is to stimulate weak economic growth,
without which it has little chance of reducing its public debt
of more than 130 percent of GDP.
Prime Minister Matteo Renzi has made clear he wants to see
increased budget flexibility under EU rules. He holds the EU
presidency for the second half of 2014.
The European Parliament's Socialists and Democrats group
leader Hannes Swoboda indicated on Tuesday that a flexible
interpretation of EU budget rules - the Stability and Growth
Pact - was a condition for Renzi to back Juncker.
"We are in contact with Renzi. We are trying to formulate a
text for how the Stability Pact can be made more flexible
without giving up the long term project of reducing debts,"
Swoboda told a news conference.
"European Council President Herman Van Rompuy is working on
a text," Swoboda said. "It's Renzi's condition for any kind of
agreement on a candidate."
The deal would be a setback for British Prime Minister David
Cameron, who has strongly opposed the candidacy of Juncker, even
suggesting that Britain will drift closer to the EU exit if the
former Luxembourg leader gets the Commission job.
Renzi's support could have bolstered Cameron's efforts to
block Juncker, a federalist, to the EU's most powerful job
particularly since the Italian premier's standing has been
bolstered by a strong performance in last month's EU Parliament
European Council President Herman Van Rompuy, who chairs EU
summits and whose job now is to find out who has the best chance
of becoming the next president of the executive European
Commission, will see Renzi on Wednesday in Rome.
Germany's Angela Merkel has declared her support for Juncker
and Spain's Mariano Rajoy reaffirmed his backing on Monday.
Renzi has said he wants productive investments to be removed
from deficit calculations, while Economy Minister Pier Carlo
Padoan said this month that reforms being undertaken should be
taken into account in the way budget deficits are considered.
Renzi said on Sunday he would support as president of the
European Commission someone who "talks about the role of
investments, investments in school buildings and broadband".
These are things which he has said he would like to see
exempted from deficit calculations.
Renzi appears to have the blessing of Germany, the most
ardent defender of EU budget rules.
"I want to make sure that we do everything in our power to
make sure that countries that seriously implement reforms should
get encouragement and support," German State Secretary for
Europe Michael Roth said at an event in the Italian parliament.
He was echoing remarks on Monday from German Economy
Minister Sigmar Gabriel, who said he was open to debate on
giving EU countries more time and flexibility to meet the bloc's
deficit targets as long as they were committed to reforms to
EU policymakers say that it is precisely this commitment to
reforms that is the most difficult issue.
Last year, France was granted two more years to bring its
budget deficit below the EU ceiling, but it did not deliver on
its promises of reforms and appears poised to miss the extended
The chairman of euro zone finance ministers Jeroen
Dijsselbloem and EU Economic and Monetary Affairs Commissioner
Olli Rehn have been talking about reversing the sequence - first
a country undertakes economic reforms by passing laws, and then
it gets more time to reduce the deficit.
The Stability and Growth Pact sets a limit on budget gaps at
3 percent of gross domestic product and at 60 percent of GDP for
public debt and says every EU country must strive to bring its
budget close to balance or into surplus.
Italy's budget deficit has come in bang on the EU's deficit
ceiling of 3 percent in the last two years and the EU has ended
its disciplinary steps against Rome.
EU budget rules, changed in 2005 under Jean-Claude Juncker's
EU presidency, also note that countries trying to reach budget
balance, like Italy, should have room for budgetary manoeuvre
when it comes to public investment.
The rules also say the EU will take into account
implementation of major structural reforms that raise potential
growth to help the long-term sustainability of public finances.
Italian government undersecretary for EU Affairs Sandro Gozi
noted on Tuesday that sufficient margins for flexibility already
existed in the rules even though they had "never been fully
exploited due to a restrictive interpretation, partly
bureaucratic and partly through mistrust."
(Additional reporting by Giselda Vagnoni in Rome, writing by
Jan Strupczewski. Editing by Mike Peacock)