Divisions Deepen as Tide Turns against Eurozone Austerity

Eurozone divisions over the austerity policies championed by Germany deepened on Monday as Italy prepared to unveil a change of direction and France's ruling Socialist Party struggled to quell a revolt over the issue by its own lawmakers.

Critics of the tough belt-tightening that Germany and its allies have advocated as the answer to the single currency zone's debt crisis sense that the tide may be turning in their favor.

With the economic situation continuing to deteriorate in southern Europe, Spain last week secured an extra two years to meet European targets on the size of its budget deficit, after warning its partners that an economy in which more than one in four of the workforce is unemployed could not withstand any more pain.

Italy looked set Monday to take a similar line following the formation of a government headed by Enrico Letta, the new center-left prime minister.

Letta has warned that austerity alone is "no longer enough" and has promised to focus on measures to kickstart an economy that shrank by seven percent in the five years up to 2012 and is forecast to contract by a further 1.3 percent this year.

The position of Letta and others who share his view has been bolstered by influential backing from the International Monetary Fund (IMF).

Formerly an enthusiastic cheerleader for rapid fiscal consolidation, the international lender changed tack this month and started advising Eurozone governments to refocus on growth and slow the pace of spending cuts.

The alternative, it warned, is the risk of being trapped in a destructive, downward spiral which will ultimately only make it harder to meet deficit and debt targets.

As the IMF's managing director, Christine Lagarde, articulated it, cuts don't have to be "brutal, abrupt or massively front-loaded."

In a development that could influence the debate, markets appeared relaxed Monday about the prospect of Italy loosening the fiscal reins slightly, with the new government able to raise six billion euros on bond markets at lower rates than of late.

After months in which the possibility of market turmoil forcing one or more countries to abandon the euro has loomed large over every EU policy debate, that is a development that will have been particularly welcome in Paris, where the Socialist government has battled, with little success, for a collective change of tack by the eurozone.

President Francois Hollande said France would now be looking to "pool its efforts" with the new Italian government. "Now, more than ever, Europe has to mobilize for growth," he said.

The extent to which divisions over economic policy have soured Franco-German relations was underlined by the leaking over the weekend of a document in which members of Hollande's Socialist Party accused German Chancellor Angela Merkel of selfish intransigence in her response to the debt crisis.

French ministers scrambled Monday to play down the significance of the paper, as did a German government spokesman.

But with Merkel facing elections in September, the chances of Germany abandoning a stance that plays well with voters look slim.