* Eurogroup's Dijsselbloem says no exceptions to budget
* Italy's Padoan says wants 'incentives' for reforms
* Ministerial meeting marks start of Italian EU presidency
By John O'Donnell and Francesca Landini
BRUSSELS, July 8 Italy and its allies will
receive no special treatment when EU budget rules are enforced,
the influential chairman of euro zone finance ministers said on
Tuesday, drawing battle lines as Rome embarks on the bloc's
Italy, leading a drive for greater flexibility in the way
the rules are applied to encourage growth and investment, has
the second-highest public debt in the euro zone as a proportion
of national output, after Greece.
On Tuesday, it began the first finance ministers' meeting of
its European Union presidency by calling for 'incentives' to
reform after years of rigid focus on budget austerity.
"Italy is delivering reforms and, as chairman, my goal is to
help every country to find incentives to do reforms," Italian
Economy Minister Pier Carlo Padoan told reporters.
Padoan chairs meetings of the 28 EU finance ministers, a key
forum for any change in the direction of economic policy.
But even before the session began, Jeroen Dijsselbloem, head
of the 18-nation Eurogroup of ministers from the single currency
area, painted Italy's reform effort in an unflattering light and
insisted Rome would get no special leeway.
"Competitiveness has to improve and economic growth has to
pick up and lots of work needs to be done there," he said.
"Italy has been showing almost zero growth of productivity for
many years and that has to improve."
Asked whether any flexibility would be given to Rome to meet
its budget targets, Dijsselbloem said: "We don't do flexibility
per country, we do flexibility for all of the countries."
Austrian State Secretary Jochen Danninger voiced similar
scepticism. "The existing rules are to be respected to the
letter," he told journalists ahead of the meeting.
"Within the framework of these rules, there is enough
flexibility, so no weakening of the rules."
Italy has not spelled out what it means by creating
incentives for reforms. Government ministers have hinted at the
possibility that public investments on schools or infrastructure
would not be counted towards its budget deficit.
They have also worried about rules that will require Rome to
reduce its overall debt level as the economy, just out of
recession, is struggling to grow.
Italy's debt is projected to reach 135 percent of output at
the end of the year, from around 133 percent in 2013.
Under EU rules, governments have to strive to balance their
books and cut public debt to 60 percent of gross domestic
product within 20 years.
But the regime also says that governments can be given more
time if they undertake reforms that help economic growth - an
option that has so far never been used.
The ministerial debate began as Jean-Claude Juncker, the
designated president of the European Commission, was to begin
meeting political groups in the European Parliament to outline
his policy programme.
The former Luxembourg prime minister and Eurogroup chairman,
who has put measures to encourage economic growth at the centre
of his agenda, is likely to be sympathetic to arguments that
more leeway needs to be shown.
Supported by the main pro-European centre-right, centre-left
and liberal groups, Juncker is expected to win approval from the
EU legislature in a vote on July 16.
EU leaders nominated him last month despite opposition from
Britain, which depicted him as an old guard federalist and
Brussels insider, unsuited to the task of shaking up the
executive body which proposes and enforces EU laws.
(Additional reporting by Jan Strupczewski and Martin Santa;
Editing by Paul Taylor)