Schaeuble said he was confident France's new Socialist government would ratify Europe fiscal pact because policymakers were working on a strategy to improve growth, as demanded by French President Francois Hollande.

"Regarding the crisis of confidence in the euro ... in 12 to 24 months we will see a calming of the financial markets," he told France's Europe 1 radio.

Investors spooked by the political turmoil in Greece and an escalating banking crisis in Spain have piled into safer assets in recent days, erasing this year's gains in share markets and sending core sovereign bond yields to new lows.

With Greece heading towards another election on June 17, the German minister said only the Greek people could decide whether the recession-mired country would stay in the euro. An election this month failed to provide a government after a strong showing by parties opposed to EU/IMF bailouts.

"It's up to Greek politicians to explain the reality to their people and not make false promises," he said. "There are too many Greek politicians who say that Europe is the cause of their problems. It's not true."

"We want Greece to stay in the euro but meet its commitments and that's a decision that's up to the Greeks," he said, adding the government must push ahead with reforms to return its economy to health.

Recent polls have suggested fresh elections would lead to a win for the conservative New Democracy party, which could form a government in favor of the rescue package.

'WORKING ON GROWTH'

Schaeuble said he was confident France would ratify the treaty on budget discipline signed by 25 EU leaders in March, despite Hollande's demands to add a growth dimension to a treaty.

The Socialist president has warned that, otherwise, German-led austerity in Europe would drag the region towards a prolonged, damaging recession.

"I don't think anyone is seriously considering renegotiating the budget pact. The new French president is simply saying that is not all we should be doing. He wants to add other elements - of course we are working on growth, on youth unemployment. We are doing that already," Schaeuble said.

Germany has retained faith with a mantra of fiscal discipline even as voters have toppled belt-tightening governments in France and elsewhere.

But pressure has been growing for it to shift its stance towards more of a pro-growth agenda, and that is likely to be ratcheted up at this weekend's G8 summit in the United States.

At a meeting in Berlin on Tuesday, hours after his inauguration, Hollande agreed with German Chancellor Angela Merkel that the two allies would submit proposals for stimulating growth to a European summit in June.

Hollande has called for more lending by the European Investment Bank, better use of EU Structural Funds, the introduction of joint project bonds to finance infrastructure schemes and a financial transactions tax to fund development.

"We are open to all suggestions which would help us to increase growth but we have to see if these propositions are useful," Schaeuble said.

New French Prime Minister Jean-Marc Ayrault, speaking on France Inter radio, said that structural funds should be channeled to Greece to help it grow, not just focus on reducing its debt.

"Greece needs to revive its economy. There are unused structural funds and what's needed now is help to secure that revival alongside putting its accounts back in shape," he said. "We waited too long before helping Greece. This has been going on for two years now and only gets worse."

Ahead of the G8 summit, Ayrault said Washington was asking why Europe had not done more to stimulate its economy. "We want a change of course in Europe on economic growth," he said.

(Reporting By Daniel Flynn; editing by Brian Love, John Stonestreet)

• A Permanent Economic Emergency