* More budget leeway key for Italy's support for Juncker
* EU budget rules already contain needed flexibility
* Germans open to bid for budget manoeuvre for reformers
* EU deal with Italy would be blow for Cameron
* EU sources say Juncker likely to be nominated on June 26
(Adds Gozi comments, EU officials)
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.
A senior Italian official said Renzi had not yet decided who
to back for the Commission job but will insist that the nominee
commits to policies that support growth and employment.
"We're not getting hung up on any particular name, we want
commitments on political priorities," Undersecretary for
European Affairs Sandro Gozi told Reuters.
"We want whoever becomes president of the Commission,
including Juncker, to commit to political priorities of jobs,
growth, energy and fundamental rights," he said.
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 vehemently 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, regarded as a European federalist, to the EU's
most powerful job, particularly since the Italian premier's
standing has been strengthened by a good performance in last
month's EU Parliament elections.
Van Rompuy, who chairs EU summits and is working to build
consensus on a candidate and a policy agenda for the Commission,
will meet Renzi on Wednesday in Rome.
Sources close to him said there was no plan to tweak the
EU's budget rules, which already contained some flexibility,
however the proposed policy agenda would focus strongly on
efforts to revive growth and employment, including by opening
the EU's single market in energy and digital services.
Germany's Angela Merkel has declared her support for Juncker
and Spain's Mariano Rajoy reaffirmed his backing on Monday.
Juncker has declared that, if he becomes Commission head,
his priority would be growth and jobs, an energy union, a trade
agreement with the U.S. and striking a deal with Britain but
without compromising the EU's fundamental freedoms.
The sources said it was increasingly likely Juncker would be
nominated at the June 26-27 summit despite British objections,
since Cameron had rebuffed efforts at compromise and failed to
build wider support for his position.
There were signs that the Dutch and Swedish prime ministers,
who initially backed Cameron, could be assuaged by the time of
the summit, they said. Prolonging the standoff would only
exacerbate tension and give the impression the EU was paralysed.
Gozi said Rome wanted a deal with as much consensus as
possible "because to begin the (Italian EU) presidency with a
split in the European Council and with even worse tension
between the council and the parliament would certainly not be
the best way".
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 some blessing from Germany, the most
ardent stickler for 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 echoed remarks on Monday by 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 boost competitiveness.
EU policymakers say ensuring this commitment to reforms is
the most difficult issue.
Last year, France was granted two more years to bring its
deficit below the EU ceiling, but it has yet to deliver on
promised reforms and looks likely to miss the extended deadline.
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.
The EU rules, changed in 2005 under Juncker's EU presidency,
say countries trying to reach budget balance, like Italy, should
have room for fiscal manoeuvre regarding 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.
Gozi noted earlier 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 and Paul
Taylor; writing by Jan Strupczewski; Editing by Mike Peacock)