* Dijsselbloem says no exceptions to budget rules
* Italy's Padoan calls for "incentives" for reforms
* Germany's Schaeuble says economic reform alone not enough
* Juncker says spending leeway is limited
(Adds news conference after EU ministers' meeting, comment from
By John O'Donnell and Francesca Landini
BRUSSELS, July 8 Italy and its allies will
receive no special leeway in meeting EU budget rules, European
officials agreed on Tuesday, as Germany resisted attempts to
soft-pedal on long-promised spending reforms.
Italy, leading a drive for greater flexibility in the way
the rules are applied to encourage economic growth and
investment, has the second-highest public debt in the euro zone
as a proportion of national output, after Greece.
Italian Prime Minister Mateo Renzi, pressing his campaign
for greater fiscal flexibility, said all the money governments
invested in broadband networks should be stripped out of the
calculation of public deficits.
"Every euro spent in digital infrastructures must be out of
the box," Renzi said in English at a conference in Venice.
Italy opened the first finance ministers' meeting of its
European Union presidency by calling for "incentives" to reform
after years of rigid focus on budget austerity. But Rome faced
immediate resistance, including from Germany.
"Italy is delivering reforms and ... my goal is to help
every country to find incentives to do reforms," Padoan said.
"If we want to see more investment we need to make the
investment environment more friendly."
Padoan chairs meetings of the 28 EU finance ministers, a key
forum for any change in the direction of economic policy.
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."
In part of the meeting that was broadcast, German Finance
Minister Wolfgang Schaeuble cautioned peers against slacking on
budgets, saying that structural reforms were no alternative to
reining in excess spending or "fiscal consolidation".
The European Commission also quickly pushed back.
"All expenditures must be taken into account when
calculating the budget deficit," EU Economic Commissioner Siim
Kallas told a news conference after the meeting of ministers.
"Can military expenditures be excluded from deficit
calculations? You can imagine what would happen if this would be
a possibility. Let's keep the rules," he said.
NO "FLEXIBILITY PACT"
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."
Italian ministers have hinted at the possibility that public
investments on schools and road and rail infrastructure should
also not be counted towards its budget deficit.
They have expressed worry about rules that would 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. 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.
The ministerial debate took place as Jean-Claude Juncker,
the designated president of the European Commission, began
meeting political groups in the European Parliament to outline
his policy programme.
The debate about whether to let governments loosen their
purse strings or make them stick to austerity played a big part
in his questioning by lawmakers, participants said.
In his first meeting with the Socialist group, Juncker
conceded that there had been "weaknesses on the social side" in
the rescue of the euro currency during the financial crisis.
He emerged from the meeting saying that a centre-left Social
Democrat would probably take the powerful post of EU economic
and monetary affairs commissioner, which oversees euro zone
national budgets. The post has been held by centre-right liberal
Olli Rehn since 2009.
The former Luxembourg prime minister and Eurogroup chairman,
who has put measures to encourage growth at the centre of his
agenda, is sympathetic to anti-austerity arguments.
Nonetheless, he believes there are limits to the budget
leeway that can be granted and the rules should not be altered.
"The stability pact will not become the flexibility pact,"
he told Social Democrats, referring to the EU budget rules,
according to one person present at the meeting.
"We cannot spend the money we don't have," he later told
liberal lawmakers in the European Parliament. "Those who want me
to say that tight fiscal discipline is over, are wrong."
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 Robin Emmott, Jan Strupczewski and
Martin Santa; Editing by Paul Taylor and Andrew Roche)