The European Union's focus on austerity has hit the limits of public acceptance, according to the head of the EU's executive arm, as Brussels joined the International Monetary Fund in raising concerns over the impact of public spending cuts.

José Manuel Barroso, president of the European commission, also signalled that governments would be given more leeway if they were struggling to get their budget deficits within the required ceiling of 3% of GDP.

He said the argument raging over the merits of austerity versus more public spending was a false debate – the answer was to combine the two, although public spending cuts alone would not provide the solution.

"Socially and politically, one policy that is only seen as austerity is, of course, not sustainable," Barroso said. "We haven't done everything right … The policy has reached its limits because it has to have a minimum of political and social support."

His comments follow last week's intervention on UK economic policy by the IMF. Its chief, Christine Lagarde, said the poor performance of the UK economy left her with no alternative but to urge George Osborne to revisit his austerity policy.

Barroso's remarks were a rare admission from Brussels that its policy prescriptions, mainly crafted by eurozone governments with Berlin in the driving seat, for dealing with the crisis of the past three years had either been flawed or were running out of steam. He added that in the quest to pull the eurozone back into growth, there was no point in piling up more debt. "Growth based on debt is unsustainable, artificial. That's the biggest lesson of the crisis," he said.

Barroso's unusual critique of German-driven austerity policies, particularly in the eurozone and in bailed-out countries, came as one of the biggest players in the bond markets also called for a relaxation of Berlin-style fiscal rigour.

Bill Gross, manager of Pimco, the world's biggest bond fund, said: "The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not." In an interview with the Financial Times, he added: "You've got to spend money."

In Berlin, meanwhile, four months before the biggest election in Europe this year, chancellor Angela Merkel signalled that the recovery of the eurozone might have to come at the cost of reduced sovereignty for member states over economic policy. "It is chaos right now," she said, referring to "incompatible" economic structures and policies across the eurozone, which were impeding a successful resolution of the crisis. "We need to be ready to accept that Europe has the last word in certain areas . Otherwise we won't be able to continue to build Europe. We don't always need to give up national practices, but we need to be compatible."

Her remarks appear to presage a big fight between now and the summer between EU leaders over eurozone economic and fiscal policymaking, with Berlin and Paris fundamentally at odds.

The pair had planned to deliver a joint policy proposal by next month before an EU summit in June, but the French president, François Hollande, appears reluctant to go along with the scheme.

The policy paper has not being drafted and it appears that Hollande has decided to wait until after the German election in September before deciding his next moves in the key Franco-German relationship.