Merkel rival stands by Hollande in rejecting austerity

PARIS (Reuters) - Chancellor Angela Merkel's Social Democrat (SPD) rival in this year's election accused the German leader during a visit to France on Friday of dragging Europe's southern economies into a vicious circle of ruin by insisting on fiscal austerity.

The accusation by Peer Steinbrueck, made after talks with French President Francois Hollande, echoed France's campaign for a re-balancing of euro zone policy to allow more leniency on budget deficits and promote more growth.

Five months before federal elections, it was Steinbrueck's latest attempt to stake out policy differences between himself and the conservative Merkel, whose conservative bloc has a comfortable lead over the SPD in German opinion polls.

"We are very critical about the fact that with this focus on a very rigid consolidation course, many countries are getting trapped in a vicious circle which is weakening their economies," Steinbrueck told reporters in Paris.

"What the chancellor is promoting in European forums is a concentration on consolidation which is damaging the economies of these countries, leading to higher unemployment, lower tax revenues," he said.

He did not name countries but referred to those on the Mediterranean suffering under the weight of debt mountains. Greece and Cyprus are making drastic reforms to cut debt in exchange for EU-backed bail-outs, while Spain and Italy are also undergoing painful austerity courses.

There is speculation that France could be the next country to be caught in the eye of the storm, especially after it conceded it would miss its target of cutting the deficit to three percent of output this year, and with 2013 growth forecast at little more than zero.

But Steinbrueck rejected criticism of Hollande for failing so far to address the rigidities in France's labour market and public spending excesses which many economists say are at the heart of its declining share in world export markets.

"I would ask for a bit more understanding for the fact that in 10 or 11 months President Hollande is not going to make good on all that his two predecessors didn't manage in 10 to 15 years," he said of Hollande's conservative predecessors Nicolas Sarkozy and Jacques Chirac.

There was no immediate French comment after Steinbrueck's meeting with Hollande, but his comments chime perfectly with the line Hollande has taken since his election last May.

"They (the Germans) are sucking up the rest of the euro zone's energy," Emmanuel Macron, a top economic adviser to Hollande, told a conference in Paris late on Thursday.

"We should have an adult debate on the subject of how to use the German surpluses," he said of Germany's trade surplus and its near-balanced fiscal position.

"Shouldn't they provide stimulus?" he asked, echoing a similar call by French Finance Minister Pierre Moscovici that Germany should adapt its policies to help raise growth around a euro zone mostly stuck in recession.

(Additional reporting by Leigh Thomas; Editing by Noah Barkin)