France, Italy join forces against 'high priests of austerity'

Paris (AFP) - The left-wing leaders of France and Italy launched an offensive Tuesday against strict EU budget policies, warning two days ahead of a key summit that austerity was holding back economic growth.

Top austerity promoter Berlin however showed no sign of backing down, as European Union leaders prepare to gather in Brussels from Thursday to name the 28-nation bloc's top officials.

France's Socialist President Francois Hollande and Italy's popular new Prime Minister Matteo Renzi have been leading a charge against the rigid application of a rule requiring that budget deficits not exceed three percent of annual gross domestic product.

Both have denied seeking to change the rule but have called for more leeway in how it is applied, especially in the setting of deadlines to reach the three percent goal.

In a letter to European Council President Herman Van Rompuy on Tuesday, Hollande said a "deeper discussion" was needed to come up with "a balanced budget policy" for the eurozone.

"France proposes that budgetary rules be applied in a manner favourable to investment and employment," Hollande wrote in the letter, a copy of which was obtained by AFP.

"It is about taking full advantage of flexibilities to take into account reforms undertaken by countries and their economic situations," he wrote.

In a speech to parliament on Tuesday, Renzi also lashed out at the rigid application of budget rules, calling for a shake-up in Europe's approach to economic growth.

"If Europe does not change course there will be no growth," Renzi said, warning the "high priests and prophets of austerity" that "there can be no stability possible if there is no growth."

He said Europe was at a crossroads and needed to win back Europeans tired of years of economic decline or stagnation.

- Europe 'without soul' -

"Today Europe is boredom... it is submerged by numbers and without soul," Renzi said.

Data released on Monday showed that eurozone business activity slipped for the second month running in June, suggesting a modest recovery from its recent crisis could be stalling.

But defenders of strict fiscal discipline are wary of calls to loosen budget rules, fearing that could lead to a public spending spree that would threaten the eurozone's long-term stability.

German Finance Minister Wolfgang Schaeuble on Tuesday made clear that Berlin was in no mood for compromise.

"Running up new debt would be the worst possible mistake we could make," Schaeuble told Germany's InfoRadio.

EU members should "stick to the rules we jointly drew up. Nothing more, nothing less," he said.

Germany "provides the proof that a sensible fiscal policy and a continuous reduction of the deficit is one of the preconditions for sustainable growth," Schaeuble said.

Hollande also called for a five-year EU-wide investment programme that would see about 240 billion euros ($325 billion) spent annually on infrastructure projects, research and innovation, and youth training.

The growing divide over budget rules is likely to play an important role as this week's Brussels summit sees leaders chose the bloc's top officials.

At a gathering in Paris on Saturday, European centre-left leaders including Hollande and Renzi agreed to back the contentious candidacy of Jean-Claude Juncker to become the new head of the European Commission, the EU's powerful executive body.

But they said they would be seeking to put left-wingers in other posts up for grabs as the EU replaces figures including the Council president, Eurogroup chief, foreign policy chief and European Parliament head.

The candidacy of Juncker -- a long-serving Luxembourg premier and EU insider -- has deeply angered Britain, which sees him as a federalist who will not adopt reforms London says are needed in the bloc.

EU leaders have been struggling with how to tackle widespread disillusionment with the bloc, after Europeans last month delivered a stinging wake-up call in a vote that saw a surge by anti-EU parties.

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