The European Union, supported by Germany, is working to meet an Italian demand to shift focus from austerity towards growth, in a deal that could help cement Jean-Claude Juncker as the next European Commission president, despite UK opposition.
Italy's priority is to stimulate weak economic growth, without which it has little chance of reducing its public debt of more than 130% of GDP.
Prime Minister Matteo Renzi has made clear he wants to see increased budget flexibility under EU rules. He holds the EU presidency for the second half of 2014.
A senior Italian official said Renzi had not yet decided who to back for the Commission job but will insist that the nominee commits to policies that support growth and employment.
"We're not getting hung up on any particular name, we want commitments on political priorities," said Sandro Gozi, the Italian Undersecretary for European Affairs.
"We want whoever becomes president of the Commission, including Juncker, to commit to political priorities of jobs, growth, energy and fundamental rights," he said.
More flexible interpretation of budget rules
The European Parliament's Socialists and Democrats group leader Hannes Swoboda indicated on Tuesday that a flexible interpretation of EU budget rules - the Stability and Growth Pact - was a condition for Renzi to back Juncker.
"We are in contact with Renzi. We are trying to formulate a text for how the Stability Pact can be made more flexible without giving up the long term project of reducing debts," Swoboda told a news conference.
"European Council President Herman Van Rompuy is working on a text," Swoboda said. "It's Renzi's condition for any kind of agreement on a candidate."
Setback for Cameron
The deal would be a setback for British Prime Minister David Cameron, who has vehemently opposed the candidacy of Juncker, even suggesting that Britain will drift closer to the EU exit if the former Luxembourg leader gets the Commission job.
Renzi's support could have bolstered Cameron's efforts to block Juncker, regarded as a European federalist, to the EU's most powerful job, particularly since the Italian premier's standing has been strengthened by a good performance in last month's EU Parliament elections.
Van Rompuy, who chairs EU summits and is working to build consensus on a candidate and a policy agenda for the Commission, will meet Renzi on Wednesday in Rome.
Sources close to him said there was no plan to tweak the EU's budget rules, which already contained some flexibility, however the proposed policy agenda would focus strongly on efforts to revive growth and employment, including by opening the EU's single market in energy and digital services.
Germany's Angela Merkel has declared her support for Juncker and Spain's Mariano Rajoy reaffirmed his backing on Monday.
Juncker has declared that, if he becomes Commission head, his priority would be growth and jobs, an energy union, a trade agreement with the U.S. and striking a deal with Britain but without compromising the EU's fundamental freedoms.
The sources said it was increasingly likely Juncker would be nominated at the June 26-27 summit despite British objections, since Cameron had rebuffed efforts at compromise and failed to build wider support for his position.
There were signs that the Dutch and Swedish prime ministers, who initially backed Cameron, could be assuaged by the time of the summit, they said. Prolonging the standoff would only exacerbate tension and give the impression the EU was paralysed.
Gozi said Rome wanted a deal with as much consensus as possible "because to begin the (Italian EU) presidency with a split in the European Council and with even worse tension between the council and the parliament would certainly not be the best way".
Renzi has said he wants productive investments to be removed from deficit calculations, while Economy Minister Pier Carlo Padoan said this month that reforms being undertaken should be taken into account in the way budget deficits are considered.
Renzi said on Sunday he would support as president of the European Commission someone who "talks about the role of investments, investments in school buildings and broadband".
These are things which he has said he would like to see exempted from deficit calculations.
Renzi appears to have some blessing from Germany, the most ardent stickler for EU budget rules.
"I want to make sure that we do everything in our power to make sure that countries that seriously implement reforms should get encouragement and support," German State Secretary for Europe Michael Roth said at an event in the Italian parliament.
He echoed remarks on Monday by Economy Minister Sigmar Gabriel, who said he was open to debate on giving EU countries more time and flexibility to meet the bloc's deficit targets as long as they were committed to reforms to boost competitiveness.
EU policymakers say ensuring this commitment to reforms is the most difficult issue.
Last year, France was granted two more years to bring its deficit below the EU ceiling, but it has yet to deliver on promised reforms and looks likely to miss the extended deadline.
The chairman of euro zone finance ministers, Jeroen Dijsselbloem, and EU Economic and Monetary Affairs Commissioner Olli Rehn have been talking about reversing the sequence – first a country undertakes economic reforms by passing laws, and then it gets more time to reduce the deficit.
The Stability and Growth Pact sets a limit on budget gaps at 3% of gross domestic product and at 60% of GDP for public debt and says every EU country must strive to bring its budget close to balance or into surplus.
Italy's budget deficit has come in bang on the EU's deficit ceiling of 3% in the last two years and the EU has ended its disciplinary steps against Rome.
The EU rules, changed in 2005 under Juncker's EU presidency, say countries trying to reach budget balance, like Italy, should have room for fiscal manoeuvre regarding public investment.
The rules also say the EU will take into account implementation of major structural reforms that raise potential growth to help the long-term sustainability of public finances.
Gozi noted earlier that sufficient margins for flexibility already existed in the rules even though they had "never been fully exploited due to a restrictive interpretation, partly bureaucratic and partly through mistrust".
- 26-27 June: EU summit to decide on new EU Commission President