PARIS/BERLIN New French President Francois Hollande called for a European pact for growth to balance out German-driven austerity measures in his inaugural address on Tuesday, hours before taking his challenge to Chancellor Angela Merkel in Berlin.
Sworn in with all the pomp of the French Republic, Hollande won support from Germany's opposition Social Democrats (SPD), who vowed to use their parliamentary blocking power to delay ratifying a European budget discipline treaty until Merkel accepts accompanying measures to boost growth and jobs.
"I will propose to our partners a pact that will tie the necessary reduction of our public debt to the indispensable stimulation of our economies," the Socialist president said in his 10-minute maiden speech.
Hollande's inauguration with military honors, capped by an open-topped motorcade ride up the Champs Elysees to the Arc de Triomphe in torrential rain, marks a potential turning point in the euro zone's debt crisis amid a deepening political crisis in Greece, Europe's most pressing debt headache.
Euro zone finance ministers dismissed talk of Greece leaving the 17-nation currency area as "propaganda and nonsense" on Monday. But with the country facing the likelihood of a repeat general election that leftist anti-bailout parties believe they can win, speculation about a possible Greek exit is rattling financial markets and won't go away.
In Athens, Greek President Karolos Papoulias met party leaders on Tuesday to make a final plea for politicians to stand aside and let a government of technocrats steer the nation away from bankruptcy.
But the left-wing SYRIZA party, which surged to second place in last week's general election on an anti-austerity platform, has already rejected the proposal and looks set to force a new poll next month, prolonging market uncertainty.
The Greek political crisis and persistent jitters about the health of Spain's debt-laden banks meant that the new French leader will have no political honeymoon before plunging into crisis management with his German counterpart.
Markets and policymakers are watching the dialogue between the conservative German chancellor and the centre-left French leader for signs that they can overcome their differences on Merkel's drive for austerity and lead the euro zone together.
Declaring that Europe needed "projects, solidarity and growth", Hollande added a protectionist note that found wide support during the presidential election campaign but may worry France's EU partners to whom he addressed it.
"I will tell them of the need for our continent, in such an unstable world, to protect not only its values but also its interests in the name of reciprocity in our trade relations," he said.
In Berlin, the Social Democrats, invigorated by their victory over Merkel's Christian Democrats (CDU) in a major regional election on Sunday, said growth measures must go beyond the structural economic measures advocated by the chancellor.
"That is not our definition of growth nor that of the Socialists in France," said SPD chairman Sigmar Gabriel.
A senior Merkel ally, CDU parliamentary whip Peter Altmaier, said that while he expected no concrete measures or decisions to be taken at the first Merkel-Hollande meeting on Tuesday evening, he was confident the euro zone's two most powerful economies would reach a joint position on growth measures in time for an EU summit next month.
"It is important that we study each others' proposals. But I am sure that we will be able to agree a common Franco-German approach by the end of June at the latest," Altmaier told Reuters in an interview.
Despite the SPD's threat, Altmaier said he expected the German parliament to approve the European fiscal compact before the summer recess, which requires some opposition votes to provide the necessary two-thirds majority.
"HOMER" AFTER "MERKOZY"?
Merkel and former French President Nicolas Sarkozy, who left office on Tuesday, had dominated euro zone crisis management since the debt turmoil began in late 2009, earning the nickname "Merkozy" for their sometimes disputed leadership.
Her relationship with Hollande, which one French pundit has already nicknamed "Homer", may initially be cooler since they are from opposing political families.
But the chancellor has promised to welcome the Socialist "with open arms" and the two calm, methodical politicians may be better suited temperamentally than the calculating Merkel and the impetuous, hyperactive Sarkozy.
Hollande has said he will press Berlin to lift its veto on issuing common euro zone bonds to harmonize borrowing costs within the currency area, or to allow the European Central Bank to lend directly to governments.
Both ideas are "red lines" for the centre-right German government, although Merkel has not ruled out euro zone bonds as a long-term prospect if Europe takes more steps towards a tighter political and fiscal union.
Surprisingly strong first quarter growth figures for Germany relieved pressure on shares and the single currency on Tuesday, but worries about the deepening impact of the euro area crisis and a possible Greek exit kept demand for safe-haven assets strong.
The German economy grew 0.5 percent in the first three months of the year, well ahead of forecasts due to a big rise in exports, but weakness elsewhere in the region meant the euro zone stagnated in the first quarter.
"Germany is leading the bloc, but this doesn't mean we will have a strong rebound. Austerity is not going away and southern European economies are really struggling," said Mads Koefoed, a senior economist at Saxo Bank.
(Additional reporting by Catherine Bremer and Brian Love in Paris, Andreas Rinke in Berlin, Jan Strupczewski in Brussels and Richard Hubbard in London; Writing by Paul Taylor; Editing by Giles Elgood)