* Merkel emphasizes flexibility of EU budget rules
* Comments likely to please Italian PM Renzi
* Britain set for harsh defeat over Juncker at summit
* EU leaders may meet again on July 16 to decide other top
By Luke Baker
BRUSSELS, June 25 Britain's slender hopes of
securing Italy's support in its bid to stop Jean-Claude Juncker
becoming European Commission president crumbled on Wednesday
when Germany offered Rome on a gentler interpretation of EU
Chancellor Angela Merkel's acknowledgement that European
Union deficit curbs should be applied flexibly to promote growth
was a gesture to Italian Prime Minister Matteo Renzi, all but
ensuring he backs Juncker's nomination at a summit on Friday.
"The German government agrees that the Stability and Growth
Pact offers excellent conditions for (promoting growth and
competitiveness), with clear guard rails and limits on the one
hand and a lot of instruments allowing flexibility on the
other," Merkel told Germany's lower house of parliament.
"We must use both just as they have been used in the past."
The EU summit starts on Thursday with a solemn commemoration
in Ypres, Belgium, of the outbreak of World War One a century
ago in which millions of Europeans died. That will be followed
by a working dinner on the EU's long-term policy agenda before
the contentious decision on the Commission presidency on Friday.
The tilt in economic policy and the likely appointment of
Juncker highlight a new political balance in Europe that is set
to shape the EU's institutions for the next five years, with the
risk of Britain drifting away.
British Prime Minister David Cameron renewed his promise in
parliament to fight to the end against Juncker's nomination and
seems set to be defeated in an unprecedented summit vote.
The tentative convergence between Italy and Germany points
the way towards a German-style "grand coalition" of the
centre-left and centre-right at European level, with Renzi, the
young reformer, in the frontline with Merkel.
Renzi, whose centre-left party won a resounding victory in
European elections last month, boosting his profile on the EU
stage, has made budget flexibility a central issue as he
searches for ways to kickstart his flaccid economy.
Sandro Gozi, Italy's undersecretary for EU affairs, accepted
there was no question of altering the 2005 stability pact, just
a need to apply it more flexibly to favour investment spending
and allow countries implementing growth-enhancing reforms extra
time to meet deficit and debt targets.
"No one is asking to revise the pact but to use the rules to
their maximum," he told la Repubblica newspaper.
In a warning shot to placate German fiscal hawks, Merkel's
conservative parliamentary group said Renzi wanted to deviate
from the path of stability but Berlin would not allow any "dirty
tricks" that put Europe on a "comfortable but fatal debt track".
Italy takes over the EU's rotating presidency six months in
July, determined to re-energise the union and change the way it
works. In a speech to parliament on Tuesday, Renzi, 39, said he
was fed up with the EU acting like a "nagging old aunt".
Asked who Renzi saw as his natural allies in overhauling the
EU machinery, a senior Italian diplomat said France, Britain and
Germany all had reason to share Renzi's view and had to one
extent or another given their support.
MOMENT OF TRUTH
Going against the European grain, Cameron has waged a vocal
campaign against Juncker, 59, casting him as an old-school
federalist who does not have the skill or energy to breathe new
life into the EU.
He has also objected to the principle of EU leaders' letting
the European Parliament effectively determine the choice, since
Juncker was the leading candidate of the centre-right group that
topped the poll in the European elections.
British Europe Minister David Lidington said choosing the
Commission president from among those leading candidates risked
making the EU executive a "creature of the European Parliament".
But Juncker, who was prime minister of Luxembourg for 19
years and has been at the heart of EU decision-making since the
early 1990s, including shaping the Stability and Growth Pact,
has firm backing from Merkel and most other EU leaders.
One of Cameron's few allies, conservative Swedish Prime
Minister Fredrik Reinfeldt, said on Wednesday he was ready to
support Juncker if a majority of leaders backed him, leaving the
British leader increasingly isolated.
Herman Van Rompuy, president of the European Council and
chairman of EU summits, is determined to secure Juncker's
nomination before the summit ends on Friday, even if it means a
vote that leaves Britain isolated and defeated.
Normally EU leaders take decisions by consensus. But because
Cameron is holding firm and demanding a vote, a showdown looks
An EU ambassador said Cameron would probably lose it by 26
votes to 2, with only Hungarian Prime Minister Viktor Orban
joining him in opposition.
It would be the second time Britain has been left on the
margins on a critical EU issue in the past three years, having
been one of only two countries to veto new budget rules for the
euro zone at the end of 2011.
The confrontation has badly damaged Britain's reputation
after 41 years as a member of the union, a senior minister in
Cameron's coalition said on Wednesday, but it has gone down well
so far with British voters.
A poll conducted by Populus for the Financial Times found 49
percent of people thought Cameron was taking a strong stand,
with only 22 percent perceiving him as weak.
Yet while his tough stance may go down well at home in the
short run, it could increase the likelihood of Britain
eventually leaving the European Union, which Cameron has said he
wants to prevent.
If he is re-elected next year, Cameron has promised voters
an in/out referendum on membership by the end of 2017 after he
tries to renegotiate Britain's relationsihp with the EU. Some
polls show more Britons now leaning towards "Brexit".
EU officials and diplomats are working on ways to prevent
Britain being left out in the cold. One official said if Cameron
dropped his demand for a vote, Britain could be given the top
economic job in the Commission, or a similarly powerful post.
But there is no sign Cameron will accept such an inducement.
A British official close to him said this week the prime
minister would not be "bought off" by EU leaders. "Some
principles are worth fighting for," the official said.
If as expected Juncker is nominated by EU leaders, he will
have to be approved by a majority in the European Parliament in
a vote set for July 16.
Tentative plans are being made for EU leaders to meet again
on the same day to discuss the other top jobs that have to be
filled, including a successor for Van Rompuy, an EU foreign
affairs chief, a economics czar and the rest of the 28-member
Commission, the EU's executive.
That would bring Cameron back face-to-face with his fellow
EU leaders barely two weeks after an uncomfortable showdown.
(Additional reporting by Jan Strupczewski and Justyna Pawlak in
Brussels and Stephen Brown and Michelle Martin in Berlin;
Writing by Luke Baker; Editing by Paul Taylor)