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Italy's Letta tells Merkel Europe needs more growth

Italian Prime Minister Enrico Letta gestures at the Upper house of the parliament in Rome, April 30, 2013. REUTERS/Giampiero Sposito
Italian Prime Minister Enrico Letta gestures at the Upper house of the parliament in Rome, April 30, 2013. REUTERS/Giampiero Sposito

By Steve Scherer and Stephen Brown

ROME/BERLIN (Reuters) - Italian Prime Minister Enrico Letta, fresh from winning a confidence vote in parliament, told Germany on Tuesday his government would meet its budget commitments but expected Europe to drop its austerity mantra and do more to lift growth.

Speaking in Berlin on his first foreign visit since taking office on Sunday, Letta warned that Italy's February election, which saw a surge of support for parties attacking the European Union, showed that a change of course was needed.

"The message which has arrived from the Italian electorate should not be underestimated," he said, standing next to German Chancellor Angela Merkel at a news conference.

Merkel, seen by many in southern countries like Italy, Spain and Greece as the champion of Europe's increasingly unpopular belt-tightening approach, struck a conciliatory tone, saying "budget consolidation and growth need not be contradictory".

"The goal is not deficit or growth numbers but getting people back to work," she said.

The 46-year-old Letta, whose coalition is built on an uneasy alliance of his center-left Democratic Party and the center-right People of Freedom party of Silvio Berlusconi, has joined a growing chorus in Europe calling for an end to austerity.

"We have done and will continue to do everything needed to keep our finances in order but we believe Europe must pursue policies for growth," he said, adding that productive investment should be promoted as strongly as fiscal consolidation.

Letta took the helm of the euro zone's third biggest economy in the middle of a severe crisis, with unemployment at 20-year highs and a recession, already matching the longest since World War Two, seen dragging on all year.

He has already come under pressure from coalition partners to negotiate budget leeway for Rome with its EU partners. But he faces opposition in Germany, which has its own elections in September and where voters are strongly in favor of making heavily indebted states like Italy cut spending.

Even before the vote of confidence in the Senate on Tuesday, Berlusconi threatened to pull his People of Freedom out of the coalition if Letta does not abolish an unpopular housing tax.

HOUSING TAX

Berlusconi, who is not in cabinet but is playing a decisive role behind the scenes, added that the government must re-negotiate Italy's EU deficit commitments, echoing similar comments made earlier by two of Letta's own ministers.

Under strong pressure from Berlusconi, Letta has already agreed to halt the housing tax levy due in June and is looking at stopping a planned increase in sales tax, due to come into force in July.

But he has not said how he will pay for the 4 billion euro revenue shortfall.

Asked whether he had discussed the tax changes with Merkel, Letta said no country had to justify its internal fiscal policies so long as it maintained its overall budget targets.

"The ways in which we will find the resources are up to us, I don't have to explain it to anyone," he said.

Italy's 2013 deficit target now stands at 2.9 percent of gross domestic product, a notch below the EU ceiling of three percent, but its public debt is set to reach a towering 130 percent of gross domestic product this year, second only to Greece in the euro zone.

On Wednesday, Letta travels to Paris where he is likely to find a more sympathetic hearing from French President Francois Hollande, who is also pushing for a switch of emphasis towards growth rather than austerity.

He will then go to Brussels, where he plans talks with European Commission President Jose Manuel Barroso.

Unemployment figures on Tuesday underlined the depth of the economic crisis in Italy with an overall jobless rate of 11.5 percent in March and youth unemployment running at 38.4 percent.

With social tensions rising as a result of the crisis, both the anti-establishment 5-Star Movement led by comic Beppe Grillo and Berlusconi's PDL campaigned strongly against the EU in the recent election, blaming it for the austerity policies followed by former prime minister Mario Monti.

The country's biggest labor unions on Tuesday said they would hold a joint protest on June 22 to push for more job creation policies.

(With additional reporting by Giuseppe Fonte and Adrian Croft in Brussels; writing by Steve Scherer and James Mackenzie; editing by Mike Collett-White)

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