* Frustrated Italy opens many fronts against European Union
* Demands budget flexibility, seeks banking concessions
* Confrontation tactics rile Brussels and Germany
ROME, Jan 15 (Reuters) - Italians used to be the leading EU cheerleader, seeing Brussels as a refuge from the dysfunctions of their state. Years of recession and austerity have turned them into fierce critics.
Feeding off this anger, Prime Minister Matteo Renzi has launched a sustained attack on European Union rules and rigidity over the past month, arguing that without change the 28-nation bloc might disintegrate.
His barrage of complaints are partly designed to fend off critics at home after continued weak economic output, but the public remonstrations are alienating EU allies who are anxious to restore calm after recent turbulent years.
“I think that the Italian Prime Minister ... is wrong to criticise the Commission from every street corner,” Commission President Jean-Claude Juncker said in Brussels on Friday, suggesting “domestic political theatre” might be at play.
In unusually blunt language, Juncker accused Renzi of trying to steal the credit for one of his own budget initiatives, adding: “I am keeping my bitterness, which is big, in my pocket.”
Rome’s grievances with Brussels reach in many directions, including Europe’s confused response to the migration crisis, its demands for budget rigour, new rules aimed at increasing the euro zone’s financial stability and EU gas strategy.
Italian officials say they do not get the respect befitting an EU founding member and have started to throw their weight around in a way that they have never done before.
Underscoring the new, combative mood, EU officials said on Thursday that Italy was obstructing a plan to give Turkey 3 billion euros ($3.3 billion) in aid in exchange for Ankara’s commitment to stem the flow of Syrian refugees into Europe.
Italy says it is merely seeking clarification on a project championed in November by German Chancellor Angela Merkel.
“The time when Europe could give us lessons or homework is over. Italy is back and will make itself heard,” Renzi said at the weekend in an open letter to his supporters. “We are in a position to say that some things have to change in Europe.”
Renzi opened fire on Brussels last year after his cabinet had to apply new EU norms in the rescue of four small banks, which wiped out the savings of thousands of retail investors and set off a political firestorm that hit his personal standing.
The regulations are aimed at shielding taxpayers from having to pick up the tab in bank bailouts, as happened in Ireland in 2010, but Renzi said they were too rigid and introduced without thinking through the likely consequences.
Perhaps his main gripe with Brussels is budget austerity.
Italy has just emerged from its longest recession since World War Two, but the forecast growth rate in 2015 of 0.8 percent is well below the output figures seen in other EU peripheral economies Spain, Ireland and Portugal.
Renzi blames the sluggish recovery in part on European Commission demands for continued deficit cuts.
Aware that pro-austerity governments in Spain and Portugal were both voted out of office last year, he has put Rome on a collision course with Brussels by approving a 2016 budget that is forecast to generate a deficit of 2.4 percent of gross domestic product against an initial commitment of 1.8 percent.
The Commission is yet to comment on the budget. However, with a debt-to-GDP ratio of 133 percent -- the highest in Europe after Greece -- Italy will come under severe scrutiny from eurozone partners anxious to avert a new sovereign debt crisis.
“Italy cannot expect the same sensitivity and leniency that other countries might get because of the sheer size of our debt,” said Francesco Galietti, founder of the Policy Sonar consultancy and a former Italian finance ministry official.
The EU Economics Commissioner Pierre Moscovici said on Thursday Italy already enjoyed more leeway than any other state and urged Rome to seek cooperation not conflict.
Renzi chose the path of conflict at a heated EU leaders’ summit in Brussels in December, openly criticising Germany’s stance on banking, energy, migration and Greece.
After the heated meeting, Merkel took Renzi aside and invited him to Berlin in early 2016 to discuss their differences, an Italian official said.
The budget row will come to a head in Brussels in May. In the meantime, the European Commission will also discuss whether Italy breached state aid rules by propping up its biggest steel maker, ILVA, and will review a revised Italian plan to help its domestic banks offload a mountain of non-performing loans.
It will also investigate whether Rome is flouting EU rules by failing to fingerprint all migrants reaching its shores.
While Brussels sees the implementation of rules as vital for the smooth functioning of Europe, freewheeling Italians see the blind adherence to regulations as potentially limiting.
Although Italians hailed the euro when it hit the streets in 2002, the love affair did not last. The latest Eurobarometer survey from October shows that the country had the most negative view of the single currency among the 18 nations that use it.
Italy’s two largest opposition parties, the anti-establishment 5-Star Movement and anti-immigrant Northern League, are both anti-euro and say they would look to revert to the old lira should they win the next election, due in 2018.
By adopting his own tough stance against EU policy-making, Renzi is tapping into this public hostility. However, unlike his outspoken domestic rivals, he has portrayed himself as a pro-European who wants reform rather than revolution.
The contours of what that reform should look like are fuzzy.
European Affairs Minister Sandro Gozi said this week that Italy sought a two-speed Europe that would let countries which desired closer integration forge ahead. He said Rome also wanted a single economy minister for the euro zone answerable to elected politicians not the unelected Commission.
Work on this should start in 2017, Gozi told daily la Repubblica, acknowledging it would require a change to EU treaties and referendums in a number of countries.
A day later, Renzi said it would be “mad” to embark on treaty changes that required potentially fraught referendums.
“Renzi has yet to develop a clear strategy to raise Italy’s standing within Europe,” said Riccardo Alcaro, a senior fellow at the Istituto Affari Internazionali (IAI) thinktank.
“At present he is putting on a show of confrontation. That might help him on the domestic front, but it won’t see him advance within Europe.” ($1 = 0.9158 euros) (Additional reporting by Francesco Guarascio in Brussels; editing by Anna Willard)
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