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Financials

UPDATE 1-EU budget deficit cuts could harm growth-IMF chief

* Strauss-Kahn says Europe needs strong economic governance

* No risk euro zone will explode, but risks working poorly

* Strauss-Kahn says must fight against speculators (Adds details)

PARIS, May 20 (Reuters) - Germany and France should not focus too quickly on narrowing their budget deficits otherwise it could dampen growth, IMF chief Dominique Strauss-Kahn said on Thursday.

Speaking in an interview on France 2 television, Strauss-Kahn said the euro zone needed strong economic governance and a growth policy to overcome the current crisis.

While he did not dispute the need for Greece, Portugal and Spain to reduce their debt, Strauss-Kahn said he was concerned about austerity plans in euro zone countries, with Germany and France leading the way.

“Big countries should not slow down too quickly otherwise they will break growth,” he said, adding that the 3 percent of gross domestic product deficit target by 2012-13 was not written in stone.

“We have to reduce the deficit, but not force it too much,” he said.

The former socialist minister also called for greater coordination in Europe.

The leaders of Germany and France pledged on Thursday to work together on financial regulation and the euro zone crisis after European discord over debt and new market rules rattled investors worldwide. For full story, see [ID:nSGE64J05H]

“I do not think the euro zone is at risk of exploding. However, the risk is that it works poorly,” the IMF chief said.

A working committee headed by Herman Van Rompuy, President of the European Council, on Friday held a first meeting focused on ways to strengthen economic governance in the European Union and the euro area.

Strauss-Kahn said that while recent events had highlighted the debt problems, it had also brought to the surface issues surrounding growth and a crisis on confidence in Europe’s ability to make collective economic decisions.

“Europe’s house is not in order,” he said, adding he regretted it had taken “months and months before coming to the brink” to agree on a Greece rescue package.

Markets are still digesting the unilateral ban on some forms of speculative trading that Berlin announced on Tuesday.

When asked about Merkel’s drive to battle speculators, Strauss-Kahn said the attacks on the euro would not have happened if Europe spoke with one voice and was not lagging behind in growth.

“There are speculators ... we must fight against,” he added.

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