By Mark John and Ingrid Melander
PARIS (Reuters) - French President Francois Hollande called on Thursday for an economic government for the euro zone with its own budget, the right to borrow, a harmonized tax system and a full-time president.
At a 150-minute news conference marking his first year in office, a day after economic data showed France had slipped into recession, the Socialist leader defended his record on economic reform and budget discipline and told the French people they would have to work "a bit longer" for a full pension in future.
Rebutting criticism that France has lost its leadership role in Europe because of its dwindling economic competitiveness, Hollande said he wanted to create a fully-fledged political European Union within two years.
"It is my responsibility as the leader of a founder member of the European Union... to pull Europe out of this torpor that has gripped it, and to reduce people's disenchantment with it," Hollande said.
"If Europe stays in the state it is now, it could be the end of the project."
He acknowledged he could face resistance from Germany, Europe's dominant power, which opposes mutualising debt among member states. Berlin is also reluctant to give the euro zone its own secretariat for fear of deepening division in the EU, between the 17 members of the single currency and the 10 others.
Non-euro Britain's government already faces growing domestic pressure to hold a referendum on leaving the bloc.
Hollande said he wanted Britain to stay in the EU but added: "I can understand that others don't want to join (the single currency). But they cannot stop the euro zone from advancing."
Speaking in Berlin before the French leader announced his initiative, German Chancellor Angela Merkel said her relations with Hollande were good, and she was "very optimistic" France would strike a balance between growth and budgetary rigor.
Hollande said a future euro zone economic government would debate the main political and economic decisions to be taken by member states, harmonize national fiscal and welfare policies, and launch a battle against tax fraud.
He proposed bringing forward planned EU spending to combat record youth unemployment, pushing for an EU-wide transition to renewable energy sources, and envisaged "a budget capacity that would be granted to the euro zone along with the gradual possibility of raising debt".
He also called for a 10-year public investment plan in the digital sector, the promised energy transition, public health and in big transport infrastructure projects.
Hollande's call for a stronger social Europe came as Spanish Prime Minister Mariano Rajoy in Madrid rejected demands by unions for greater protection for workers, saying he would pursue cuts in education and health spending to reduce the Spain's large structural deficit.
"Europe must be much more competitive and flexible," Rajoy told reporters after the talks with labor groups.
Hollande, whose approval rating has fallen further than any French president in his first year, sought to reassure left-wing voters that he remained true to his Socialist colors.
He expressed full confidence in Prime Minister Jean-Marc Ayrault, played down clashes among his ministers on economic policy while urging the government to speak with a single voice, and said there might be a reshuffle in due course, but not now.
He warned that France's pension system was unsustainable and that a reform due later this year would mean the French having to work longer in future to receive a full pension.
"As long as life expectancy gets longer, there is a principle that is obvious. The longer we live, the longer we need to work," he said.
Hollande's Socialists opposed a 2010 pension reform forced through by his conservative predecessor, Nicolas Sarkozy, that raised the minimum retirement age to 62 from 60. The Socialist leader is hoping to avoid unleashing similar strikes and unrest by having trade unions and employers negotiate a new overhaul.
The president reaffirmed a promise to reverse the rising trend in unemployment by the end of the year, despite skepticism among economists and voters that this can be achieved while the economy remains flat.
On the slump in his own popularity, Hollande was phlegmatic: "I became president at the worst of moments - but I put myself forward just the same ... I knew it was the middle of a crisis."
(Additional reporting by Leigh Thomas and Nicholas Vinocur in Paris; Fiona Ortiz in Madrid; Writing by Paul Taylor)