EU leaders wrestle with austerity as thousands protest

European Union leaders wrestled on Thursday with German demands for strict austerity and a French-led push for growth-friendly spending at a summit targeted by thousands of protesters angered by rampant unemployment.

With the EU's core eurozone economy languishing in recession, organisers said 15,000 people took part in the rally in a park next to EU headquarters in Brussels, with demonstrators shouting "Revolution!" and waving placards declaring "No to Austerity!"

Germany, the bloc's strongest economy and paymaster, is holding to a hardline on austerity, although Chancellor Angela Merkel said on her arrival that the focus had to be on youth unemployment.

That appeared to be a nod to France and its Mediterranean neighbours, which want more freedom on short-term spending decisions.

The debate is more than academic. A brash anti-austerity party won a stunning 25 percent of the vote in last month's Italian elections, a warning for Merkel who faces polls later in the year.

"I can't rule out us running the risk of a social revolution or rebellion," said Luxembourg Prime Minister and former eurozone head Jean-Claude Juncker as he arrived for the 1600 GMT start of the summit.

"We have to explain our policies better," he said.

"We do not need another summit where EU (leaders)... try to sugar-coat and deny the harsh reality," said Hannes Swoboda, head of the Social Democrat group in the European Parliament.

EU President Herman Van Rompuy said that if the worst of the debt crisis appeared over, European leaders were still meeting against a backdrop of "social distress."

"In the short-term, we cannot turn a blind eye to the social emergency in some of our countries," he said, highlighting the danger of soaring youth unemployment, which now runs at more than 50 percent in Greece and Spain.

"This is not a 'crisis' summit, it's about fighting unemployment -- particularly among the young," said Dutch Prime Minister Mark Rutte.

One EU official said the vote outcome in Italy "has made a lot of people think".

The problem, he added, was that governments still need to balance public finances after years of overspending, but austerity and belt-tightening cannot be the only response.

"If there is no growth for 10 years then you can't pay back your debt," the official said. "There is not much room for manoeuvre."

A draft of the summit conclusions obtained by AFP says that given the currently "unacceptably high levels of unemployment" -- expected to hit an unprecedented peak of around 12 percent this year -- it is critical to support growth "as a matter of priority".

Among the protesters outside the summit were some 3,000 workers for US heavy machinery firm Caterpillar, which recently announced plans to slash 1,400 Belgian jobs, and several hundred from ArcelorMittal steel plants in Belgium and France that have suffered job cuts.

The question of how to balance austerity with investment in jobs is crucial for France, after President Francois Hollande recognised he could not cut its public deficit to the EU limit of 3.0 percent of gross domestic product this year, coming in instead at 3.7 percent as a weak economy exacts its toll.

Failing to meet the target leaves France needing another year of grace from Brussels, an extension it seems likely to get.

But German Finance Minister Wolfgang Schaeuble made the case again Wednesday for sticking to austerity first.

"Growth and (budgetary) consolidation are not mutually exclusive but rather they reinforce each other," Schaeuble said. "The confidence that solid state finances brings is the pre-condition for sustainable growth."

Highlighting the point and the sharp difference with France, the German government approved a 2014 budget based on the lowest headline deficit for some 40 years.

Later on Thursday, in a break from the full 27-member EU's two-day talks, the 17 eurozone leaders will also discuss financially beleaguered Cyprus, after meeting the island's newly elected president, but they are not expected to make any decisions on a planned debt bailout.

That issue will be covered by a separate eurozone finance ministers meeting late Friday after the summit closes, in the presence of key creditor and International Monetary Fund head Christine Lagarde.

The second day of the summit Friday will review relations with the EU's strategic partners, notably Russia, where ties have been strained by President Vladimir Putin's clampdown on the opposition.