* Letta eyes wider backing in meeting with Spanish PM
* Wants EU policy shift towards more growth, less austerity
* ISTAT says economy will shrink 1.4 pct this year
* But data suggests recession gradually easing
By Gavin Jones
ROME, May 6 Italy can stage an economic recovery
without increasing its huge public debt, Prime Minister Enrico
Letta said on Monday ahead of a meeting with his Spanish
counterpart where he hoped to find support for his calls for a
policy switch in Europe.
Data on Monday offered a glint of hope that Italy's longest
recession for 20 years may be gradually easing, though the euro
zone's third largest economy is still expected to contract
sharply in 2013 for the second year running.
Letta, who heads a broad left-right coalition formed after
two months of post-election disarray, is under conflicting
pressures to cut taxes and stimulate the economy while not
breaking austerity commitments to Italy's European Union
"It's possible to create growth without running up debts.
Other countries have proved that, I know very well that it's
difficult, but this is the aim," Letta told reporters in Milan.
"Unfortunately we are a concrete example that increasing
debt doesn't mean fostering growth, because in all these years
we have created a lot of debt without growing."
Letta has toured European capitals since he took office last
week calling for an EU policy switch to focus more on growth and
less on austerity.
He was to meet Spanish Prime Minister Mariano Rajoy in
Madrid later on Monday. He described Spain, which has one of the
region's highest jobless rates, as "a natural ally to make
Europe a continent of attention to growth and social problems."
Italy has been the euro zone's most sluggish economy for
more than a decade and its public debt, at 127 percent of output
last year, is the second highest in the region after Greece.
COALITION STRAINS OVER SPENDING
At home, Letta is having to mediate among different demands
within his government.
Deputy Economy Minister Stefano Fassina picked a fight with
his boss on Sunday when he said Italy should allow its deficit
to rise this year and ask the EU for two more years to cut it
below the EU's limit of 3 percent of output.
Fassina, from Letta's centre-left Democratic Party, echoed
similar calls from centre-right leader Silvio Berlusconi and
contradicted Economy Minister Fabrizio Saccomanni, who last week
ruled out any re-negotiation of Italy's budget targets.
On Monday the parliament formed after February's election
began discussing the multi-year targets of Letta's predecessor
Mario Monti. It is expected to ask the government to loosen next
year's deficit goal, currently set at 1.8 percent of output.
The new Italian premier, criticised for pledging tax cuts
and more welfare without explaining how to finance them, said on
Monday that what he called his "dreams" were "necessary amid the
arid politics of numbers."
The country's service sector shrank for the 23rd consecutive
month in April but at the slowest rate for nearly two years, a
survey showed on Monday, following similar findings for the
manufacturing sector published last week.
However, national statistics bureau ISTAT forecast on Monday
that gross domestic product would fall 1.4 percent this year
following last year's 2.4 percent drop, slashing a previous
projection of a 0.5 percent decline.
ISTAT forecast a modest recovery of 0.7 percent in 2014
thanks to improved domestic demand, but said joblessness would
continue to climb to 12.3 percent in 2014 from a projected 11.9
percent this year.