* Merkel emphasises flexibility of EU budget rules
* Comments likely to please Italian premier Renzi
* Britain set for defeat over Juncker as Dutch, Swedes
* EU leaders may meet again on July 16 to decide other top
(Adds Cameron calls with Merkel, Rutte)
By Luke Baker
BRUSSELS, June 25 Britain's slender hopes of
securing Italian support in its campaign to stop Jean-Claude
Juncker becoming European Commission president crumbled on
Wednesday when Germany offered Rome a gentler interpretation of
EU budget rules.
Chancellor Angela Merkel acknowledged that a European Union
pact that sets limits on government deficits should be applied
flexibly to promote economic growth. This gesture to the wishes
of Italian Prime Minister Matteo Renzi all but ensures he will
back 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
59-year-old 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.
Juncker, who was prime minister of Luxembourg for 19 years,
has been at the heart of EU decision-making since the early
1990s. But British Prime Minister David Cameron has waged a
campaign against Juncker, casting him as an old-school
federalist who does not have the skill or energy to breathe new
life into the EU.
Cameron renewed his promise in parliament to fight to the
end but seems certain to be overwhelmingly defeated in an
unprecedented summit vote he has demanded.
The leaders of Sweden and the Netherlands, who initially
shared Cameron's reservations, both announced they would not
block Juncker and a senior German official forecast "a very
large, dominant majority" in favour of the appointment.
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 the conservative 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
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 for 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".
MOMENT OF TRUTH
Cameron 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
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 has firm backing from Merkel and most other EU
leaders. Conservative Swedish Prime Minister Fredrik Reinfeldt
said on Wednesday he was ready to support Juncker if a majority
of leaders backed him, and Dutch Prime Minister Mark Rutte told
parliament he would not block him if it came to a vote, leaving
the British leader virtually isolated.
Herman Van Rompuy, president of the European Council and
chairman of EU summits, is determined to secure Juncker's
nomination before the meeting ends on Friday, even if it means a
vote that leaves Britain isolated and defeated.
Normally EU leaders take decisions by consensus but a
showdown looks increasingly likely because Cameron is holding
firm and demanding a vote. 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 stand may go down well at home in the short
run, it could increase the likelihood of Britain eventually
leaving the EU, 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 relationship 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.
Merkel and Rutte both called Cameron on Wednesday to discuss
the appointment, but a spokeswoman for the British leader said
he had told them he would not drop his opposition to the process
of the parliament choosing a preferred candidate.
"Chancellor Merkel and Prime Minister Rutte recognised the
prime minister's position and agreed that if the European
Council decides not to proceed by consensus then there should be
a vote," the spokeswoman said.
"Both leaders also underlined their support for Britain's
continued membership of a reformed European Union and their
ongoing commitment to working with the prime minister as he
renegotiates Britain's relationship with the EU."
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 and
Kylie MacLellan in London; Writing by Luke Baker; Editing by
Paul Taylor and David Stamp)