France and Italy won support for a slightly more growth-friendly interpretation of European Union budget rules at a summit after French President Francois Hollande challenged German-driven fiscal austerity.

The 27 EU leaders agreed, after debating how to overcome mass unemployment and recession unleashed by three years of the euro zone’s sovereign debt crisis, to allow greater leeway for public investment when reducing government deficits.

“The possibilities offered by the EU’s existing fiscal framework to balance productive public investment needs with fiscal discipline objectives can be exploited in the preventive arm of the Stability and Growth Pact,” the summit conclusions said.

Exceptions would have to be approved by the executive European Commission and fellow eurozone states, but Hollande and Italy’s Europe minister drew encouragement from what they depicted as a concession.

“We are meeting our (deficit reduction) commitments but in a way that does not contradict our objective of growth,” the Socialist French leader said.

“That’s the debate that is now going to start with the Commission, and the guidance we were given today allows us to approach this discussion with confidence.”

Hollande said on arrival it was essential that governments had budget flexibility to kick-start growth with spending.

Germany, the leading stickler for fiscal discipline, is concerned that any straying from the path of deficit reduction will raise debt burdens and reignite financial market turmoil.

But Chancellor Angela Merkel avoided any clash with France, telling reporters, “We made clear in a very consensual discussion that budget consolidation, structural reforms and growth are not in contradiction but are mutually reinforcing.”

Hollande acknowledged this week that France’s budget deficit would hit 3.7 per cent of GDP this year, missing the three per cent it had promised EU partners.

In Berlin, senior German officials trumpeted their finances as the “envy of the world” and said their structural deficit, which factors out the economic cycle, would be eliminated by next year.

EC President Herman Van Rompuy focused on the urgency of fighting unemployment, with 26 million Europeans including seven million young people out of work.