UPDATE 1-EU sees Germany keeping budget surplus, Italy's debt to shoot up

The eurozone will restrain spending under draft budget plans submitted by the bloc's governments, the European Commission forecast on Thursday, despite calls to counter a worsening economic slowdown.

In its quarterly economic forecasts, Brussels said Germany, the largest economy in the 19-country bloc, would keep a budget surplus at least until 2021, although the surplus would narrow. High-debt countries would keep spending, despite recommendations for thriftiness. France's deficit would be above the EU ceiling this year and Italy's debt would grow to nearly 140% of output, the Commission predicted.

Despite a worsening growth outlook, Germany is set to maintain a large budget surplus this year at 1.2% of its gross domestic product (GDP). The surplus will narrow to 0.6% of GDP next year, and 0.2% in 2021, the Commission forecast. The Netherlands, another eurozone state that could spend more, is set for a surplus of 1.5% of output this year, 0.5% next and 0.4% in 2021.

EU economics commissioner Pierre Moscovici praised the reduction of budget surpluses but said more could be done. With economies weakening, he said it was probably time to change tack in the bloc's fiscal policy, which has so far focused on cutting deficits instead of boosting growth.

"When it starts to get cold, it is perhaps the moment to turn up the heating," Moscovici told a news conference. DEBTS

High-debt countries are expected to run large budget deficits, despite EU recommendations to control their spending. That could step up economic divergence within the euro currency area and increasing criticism against EU fiscal rules that have failed to address imbalances and are perceived by many as too strict.

Moscovici, a French socialist politician, urged EU states to reconsider fiscal rules that were hastily tightened nearly a decade ago during the bloc's debt crisis. The Commission is reviewing those regulations. Italy, which has the largest debt in absolute terms in the European Union, is to increase its debt burden to 136.2% of GDP this year. It would continue rising to 136.8% next year and to 137.4% in 2021, the Commission says.

The EU executive's forecasts diverge from the Italian government's estimates. Rome expects the debt to go down next year to 135.2% of output and to keep falling in 2021. Countries with debt above 60% of GDP are required gradually to reduce it, under EU fiscal rules.

The EU executive also forecast Italy's structural deficit, which excludes one-off expenditures and revenues and is key in the Commission's assessment of compliance with EU fiscal rules, to worsen to 2.2% of GDP this year and 2.5% in 2020, contrary to rules dictating it should improve. However, Moscovici said the Commission was not considering at this stage opening a disciplinary procedure against Italy over the country's planned budget.

The EU executive is expected to publish its assessment of eurozone states' budgets on Nov. 20. Last year, a prolonged row over the budget proposed by the former eurosceptic Italian government rattled markets and forced Rome to change it. France, which has a debt close to 100% of output, is also spending more this year and is expected to raise its budget deficit to 3.1% of GDP, the Commission estimates, above the EU's 3.0% ceiling.

A one-off cut in employers' social contributions increased last year's deficit by 0.3 percentage point, the Commission estimated. France's deficit is forecast to fall to 2.2% next year and remains at that level in 2021, the Commission said.

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