EU seeks budget flexibility

A new debate about growth has emerged in the 28-nation bloc, pitting Europe's principal austerity advocate, Germany, against the leaders of crisis-hit nations on the continent's southern periphery.

Most vocal in the debate has been Italian Prime Minister Matteo Renzi. Buoyed by his recent success in EU elections, Renzi has led calls for a new direction in EU economic policy.

He thinks the austerity-ravaged nations in the south of Europe can take no more of the bitter medicine which has crushed growth and sent unemployment soaring.

Lashing out at what he called the "high priests of austerity" in a speech before parliament on Tuesday, Renzi called for a more flexible interpretation of the EU's strict deficit and debt rules.

Under the EU's Stability and Growth Pact, member states are not allowed to run deficits in their national budgets higher than 3 percent of gross national product (GDP) and are asked to keep indebtedness below 60 percent of GDP.

"We have always said that we will respect the rules but there are different ways of looking at the question of rules and how to respect them," Renzi told parliament in Rome.

"Stability without growth becomes immobility," he said, adding that the EU should stop acting like a "nagging old aunt."

No rule change

Renzi spoke as Italy prepares to take over the EU's rotating presidency in July. The Italian prime minister has not, however, been explicit about his understanding of greater flexibility.

Italy, which is burdened with sovereign debt at about 130 percent of GDP, has long struggled to unlock growth in its sluggish economy.

Diplomats in Brussels said proposals currently being discussed center on excluding investment and research spending from deficit calculations. Another idea swirling in the debate is giving struggling countries more time to bring their budgets back into structural balance, adjusted for the ups and downs of the business cycle.

A draft summit document, presented by EU Council President Hermann van Rompuy, also doesn't mention any changes to the EU rules. But it calls for steps to create growth and jobs, demanding greater support for EU members in need of structural reforms.

Merkel softens stance

Renzi's drive is reportedly backed by France - another major EU laggard in reforming its labor market as well as its pension and welfare systems. But French President Francois Holland has so far shied away from asking for a change in the EU's deficit rules.

Instead, Hollande seeks an EU public investment program in energy and broadband networks.

Even though France is running afoul of the EU budget targets this year and will likely continue to do so next year, Hollande still supports the course of German Chancellor Angela Merkel. Merkel is opposed to any softening of the goals laid out in the stability and growth pact.

However, in a speech before parliament on Tuesday, Merkel indicated she might be willing to seek a compromise.

"The Stability and Growth Pact offers excellent conditions for promoting growth and competitiveness, with clear guard rails and limits on the one hand, and a lot of instruments allowing flexibility on the other," she told Germany's lower house of parliament, the Bundestag.

Merkel's statement has been trumpeted as a turnaround in German policy in international media. But experts believe all it offers is some scope for a limited policy inflection at the summit on Thursday and Friday.