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* Italy seeks more flexible use of budget rules to ease
* Renzi says EU must stop acting like "nagging old aunt"
* Germans won't change budget rules but see need for growth
By James Mackenzie and Stephen Brown
ROME/BERLIN, June 24 Italy and Germany are using
the same words ahead of this week's European Union summit as
debate heats up on whether economic policy should focus on
budget austerity or stimulating growth, but they do not
necessarily mean the same thing.
Italian Prime Minister Matteo Renzi, buoyed by success in
last month's EU elections, has led calls for a new direction,
saying battered southern economies can take no more of the
medicine that has crushed growth and sent unemployment soaring.
He has avoided asking for a change to the bloc's budget
rules which limit government deficits and debt, saying all Italy
asks is to use the margins for flexibility they already contain.
He and French President Francois Hollande are also calling
for a big European public investment programme in energy and
broadband networks to boost growth and create jobs.
"We have always said that we will respect the rules but
there are different ways of looking at the question of rules and
how to respect them," Renzi told parliament on Tuesday, setting
out priorities for Italy's six-month EU presidency.
He lashed out at what he called the "high priests" of
austerity, saying that without growth in Europe, there could be
no hope of fiscal stability.
"Stability without growth becomes immobility," he said,
adding that the EU must stop acting "like a nagging old aunt"
giving countries endless lists of what to do.
Tuesday's newspaper headlines must have pleased him. Seizing
on a remark by German government spokesman Steffen Seibert,
Italy's main dailies proclaimed that Chancellor Angela Merkel
had backed Renzi's calls for more budget flexibility.
"Merkel turnaround. More flexible EU pact," the left-leaning
La Repubblica proclaimed. "Merkel: flexibility in EU pact,"
business daily Il Sole 24 Ore trumpeted. "Flexible EU. Yes from
Merkel," La Stampa declared.
What Seibert said was that the EU's Stability and Growth
Pact already contained scope for flexible application in
individual cases. Countries facing a downturn could get more
time to cut their deficits and those with deficits in order
could have more room for spending on investment.
"What's clear is: the Stability and Growth Pact cannot be
called into question," he told a regular news conference.
NO LONGER SUFFICIENT
German Economy Minister Sigmar Gabriel, vice-chancellor in
Merkel's cross-party coalition, gave countries like Italy and
France hope by suggesting last week that Berlin might consider
more room on deficit rules for countries undertaking reforms.
His remarks, made during a visit to France, were swiftly
"clarified" after a discussion with Merkel and the line was
reinforced that no change to the pact would be contemplated.
Under the watchful eye of fiscal hawks ranging from Finance
Minister Wolfgang Schaeuble to Bundesbank chief Jens Weidmann
and the influential Frankfurter Allgemeine Zeitung, Merkel has
been careful not to contemplate any relaxation of the rules.
Yet one German official, speaking on condition of anonymity,
said Berlin's insistence on sticking to the rulebook masked a
recognition that some adjustment was necessary.
"There is a widely-shared realisation that the government's
emphasis so far on growth-friendly consolidation policies is
perhaps no longer sufficient. I think there is consensus on
that," the official said.
"The chancellor and Gabriel have made it clear that the
Stability Pact rules won't be changed, so it needs creative
thinking about how to generate additional growth."
That offers some scope for a real, if limited policy
inflection at the summit on Thursday and Friday.
Italy has not been explicit about what it expects from its
partners and much could turn on whether they are ready to take
Renzi at his word when he promises ambitious structural reforms.
His reform timetable has already slipped from a promised three
months when he took power in February to promising on Tuesday
that the package would be implemented by 2017.
France, the EU's other major laggard in reforming labour
markets, pensions, welfare and the tax burden on business,
called in proposals issued on Tuesday for a big EU public
investment drive and a new drive for social and tax
harmonisation in the euro zone.
Like Paris, which also wants more budget flexibility, Italy
has long struggled to implement structural reforms to unlock
growth in its sluggish economy, which is smaller now than it was
in 2000, according to national statistics office ISTAT.
Officials have spoken about excluding investment spending
from deficit calculations or winning more time to bring the
budget back into structural balance, adjusted for the ups and
downs of the business cycle.
However, EU officials note that Italy is second bottom of
the table of countries able to absorb project funds from the
European Investment Bank, raising doubts about how much of a
boost if would be likely to get from any new programme.
Rome's deficit is just within the EU's 3 percent of GDP
limit but it has one of the biggest debts in the world, expected
to top 135 percent of GDP this year. Italy also faces a steep
challenge from the so-called fiscal compact rules that impose
strict benchmarks for bringing debt down year by year.
EU rules leave some room for countries like Italy, which are
not subject to the bloc's excessive deficit procedure, to exempt
some categories of expenditure from deficit calculations.
However, France's deficit is officially forecast to be 3.8
percent of GDP this year and the country's fiscal watchdog and
court of auditors have cast doubt on its ability to meet a
promise to bring it down to 3 percent next year.
(Additional reporting by Jan Strupczewski in Brussels; Editing
by Paul Taylor)