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By James Mackenzie and Gavin Jones MILAN (Reuters) - France and Italy pressed for an easing of budget restrictions to stimulate growth and cut unemployment in Europe on Wednesday but won no concessions from German Chancellor Angela Merkel, who insisted countries had to move faster on reforms. The differences over budgetary policy overshadowed the Milan meeting of EU leaders on how to create jobs, as the multi-year budget plans of both France and Italy seemed likely to be rejected by the European Commission because of their fiscal backsliding. Italian Prime Minister Matteo Renzi, who hosted the meeting, issued a statement while it was still in progress calling for more focus on growth and expressing irritation with rigid budget rules. "If we transform Europe into a commission that finds fault with the member countries, with freely elected governments, maybe we are respecting the rules of bureaucracy ,but we are certainly killing the hope that politics can offer," he said. At a news conference after what was billed as a "high level jobs conference," Renzi and French President Francois Hollande said a change of course was needed for Europe. Merkel, however, stressed the need to stick to the rules. "France has said it will meet its commitments and I have no reason to think that Italy doesn't feel exactly the same thing," she said. "We took these decisions not long ago and so I am quite confident that everyone will meet their responsibilities." While government leaders and EU officials agreed on the need to tackle record youth unemployment, which has exceeded 40 percent in several euro zone countries, they seemed no closer on the policy prescriptions. Merkel said that before trying to spend more money in Europe it was important to identify the best use for funds already available and to ensure that they are used. Responding to a call by Hollande before the meeting for Germany to exploit its trade surplus and balanced budget to adopt more expansionary policies, she said her country had already taken steps to boost domestic demand by 15 billion euros, among them the introduction of a minimum wage. Hollande said Europe's faltering economy would continue to slow unless budget restrictions were eased "If everyone practises austerity, which isn't the case with France, we'll end up with an even greater slowdown," he warned. He argued that France, which has been criticized by Brussels for reneging on pledges to bring its budget deficit inside EU limits, was meeting its commitments "while using the margins for flexibility which are available." Former French finance minister Pierre Moscovici, who is the EU commissioner-designate to take charge of policing budget discipline in the euro zone, said he was ready to step up disciplinary action against Paris for not respecting its obligations under EU budget rules. At the same time, a European Commission source told Reuters it was "very improbable" the Commission would accept Italy's multi-year budget plan as it stands because of Rome's backsliding on a commitment to balance its budget. Renzi said Italy would keep its budget deficit inside the EU's 3 percent ceiling but made clear it was time to change the rule "conceived more than 20 years ago, in another world." PROTESTS As expected, the three-hour meeting called by Renzi, whose country holds the rotating presidency of the EU, announced no concrete measures, but Renzi won appreciation from his peers for a labor reform plan he is trying to push through parliament. However, hundreds of demonstrators gathered outside the congress center in Milan to protest his plans to overhaul hiring-and-firing rules, and an uproar by the opposition in parliament in Rome delayed a vote of confidence on the measures. Renzi wants to water down strict job-protection measures that are fiercely defended by unions and sections of his own center-left Democratic Party. The 39-year-old prime minister is desperate for a sign that he is making progress with reform promises he made when he took office in February. His labor reform is intended to shake up a system widely criticized for offering rigid guarantees to employees on full permanent contracts while leaving an increasing army of workers on short-term contracts with almost no protection. At present, permanent employees of larger companies can sue to get their jobs back in cases of unfair dismissal. But the rules exclude those on short-term contracts and do not apply to the thousands of firms with fewer than 15 employees. Renzi says rigid labor laws make it unattractive for firms to take on new staff and deters foreign investment. He wants to replace the system with a simpler set of rules that offer workers more protection as their seniority increases. But he has yet to spell out the details and the confidence vote will apply to broad-brush guidelines to be filled out later. The confidence vote in the Senate, where the government has a slim majority, is aimed at truncating debate, and Renzi said he expected party rebels to swing behind him. (Additional reporting by Giulio Piovaccari, Elvira Pollina, Elizabeth Pineau and Cristiano Corvino and Francesco Guarascio in Brussels; Editing by Janet Lawrence, Larry King)