By Daniel Flynn
PARIS (Reuters) - France's Socialist presidential candidate has become the standard bearer of the European Left's fightback against austerity, but the toned-down additions he is proposing to a German-inspired fiscal pact should prove acceptable to Berlin.
Francois Hollande, who leads in polls ahead of an expected May 6 runoff with conservative President Nicolas Sarkozy, alarmed many by vowing to "renegotiate" a treaty on budget discipline signed by 25 European leaders last month.
Relying on austerity alone would drag Europe's fragile economy back into a prolonged recession, he argued.
That appeared to set him on a collision course with German Chancellor Angela Merkel, who has made the pact a cornerstone of her strategy to avoid any repeat of the euro zone's debt crisis and a condition for granting struggling Greece a second bailout.
However, Hollande has recently been at pains to make clear he accepts the treaty's central tenet of balanced budgets and merely wants to "complete" it by adding new instruments to stimulate growth, rather than reopening its essence.
Crucially, he has dropped calls for joint debt issuance by European nations - so called euro bonds - which is a red line for Merkel's centre-right government and might also embarrass his allies in the opposition Social Democratic Party (SPD), given public resistance in Germany.
Instead, Hollande has said he aims to add to the treaty "the capacity for Europe as a whole to issue bonds, not to mutualism sovereign debt but to finance new development projects".
This step - like his call for a financial transactions tax and better use of EU structural funds - is already on the EU agenda and seems unlikely to pose major problems in Berlin.
"Now that he's no longer going all the way and calling for euro bonds, his treaty change is sellable," said Gilles Moec, senior European economist at Deutsche Bank.
A European Union source said informal work was already going on to draft a political text on promoting growth and jobs that could go alongside the treaty if Hollande wins.
That could draw on existing European Commission proposals for "project bonds", due to be reviewed by a June EU summit. If leaders give the nod, the Commission would launch a pilot phase this year with the European Investment Bank to stimulate private investment in transport, energy, and information technology - almost exactly what Hollande proposes.
While Merkel has voiced strong opposition to joint European debt issuance - a step she considers would allow spendthrift EU governments to avoid painful reforms to boost competitiveness - diplomats suggest Berlin may be more open to the idea of project bonds, a long-standing European aim.
The idea was first put forward in 1993 by former Commission President Jacques Delors - one of Hollande's political mentors - as a means to develop trans-European road, rail and information networks to consolidate the single market.
It was blocked in 1994 by Germany, which opposed the EU issuing debt. But times may have changed.
"On project bonds, there's the possibility of compromise," said Jean Pisani-Ferry, director of the Brussels-based Bruegel economic think-tank. "This could address the whole question of southern Europe, of countries which are struggling for investment and growth."
HOLLANDE ACCEPT DISCIPLINE
German officials have urged Hollande's camp to drop the term "renegotiation", which triggered alarm bells in Berlin, but they were told it was necessary for the election campaign.
Sources in Berlin suggest some addition to the treaty to include more emphasis on stimulating growth could be possible, provided the key clauses on fiscal responsibility remain intact.
The fiscal compact requires signatories to introduce national laws to balance their budgets and empowers the European Court of Justice to fine a country up to 0.1 percent of GDP if this is not done a year after ratification. The treaty is due to take effect in January once ratified by at least 12 countries.
"I accept this discipline," Hollande told a meeting of European Socialists last month, repeating his pledge to introduce a law to balance France's budget by 2017, one year later than Sarkozy has promised to do so.
His campaign manager, Pierre Moscovici, confirmed on Tuesday the Socialists would push for "add-ons" to complete the treaty with more pro-growth policies, not fundamentally re-write it.
In Berlin, officials are increasingly relaxed about Hollande's plan. While the official line remains "no renegotiation", one senior source said Germany would be willing to agree on a set of principles to append to the fiscal compact including language on growth.
With his calls to include in the treaty calls for better use of EU funds to help poorer regions and more lending from the EIB, Hollande is pushing on an open door. At a January summit, EU leaders said they would deploy 82 billion euros of unspent funds from the EU's 2007-2013 budget to help create jobs, especially for the young.
Moreover, his demands for balancing the treaty with growth measures have been taken up by left-wing opposition parties ahead of elections in Germany and Italy next year, providing leverage to his negotiating position.
Merkel requires the support of the SPD to reach the two-thirds majority in the Bundestag needed to ratify the treaty. The SPD has said, like Hollande, that a financial transaction tax is a condition for approving the text.
With opposition from EU partners including Britain - home to Europe's largest financial centre - to a broad transactions tax including derivatives, Berlin proposed last week starting with a tax on the purchase of stocks, modeled on Britain's stamp duty.
Under the plan, the EU would move towards a fuller transaction tax once critical mass was achieved.
Striking a conciliatory tone, Moscovici appeared to back the German position and toned down calls for an immediate Tobin tax.
"We are in favor of a financial transactions tax and will do everything to convince our European partners -- which may take a bit of time - to move ahead as a group. A tax makes no sense unless it is applied throughout Europe," he said.
(Additional reporting by Catherine Bremer and Paul Taylor in Paris, Annika Breidthardt in Berlin and Robin Emmott in Brussels; Editing by Paul Taylor/Jeremy Gaunt)