BERLIN (Reuters) - The European Union wants to avoid a subsidy race against the United States and does not want to fare behind Mexico or Canada as a trading partner, German Chancellor Olaf Scholz said on Friday.

Scholz was speaking alongside Italian Prime Minister Giorgia Meloni in Berlin ahead of an EU summit next week that will discuss funding for green industry projects to counterbalance subsidies in the United States and China.

The EU wants to adapt its state aid rules to prevent an exodus of investment triggered by Washington's Inflation Reduction Act, fearing it might lure away EU businesses and disadvantage European companies.

"We are all in agreement that we don't want to enter a worldwide subsidy competition," Scholz said. "That would be terrible, not so many could keep up - some countries maybe, but that also would not be the goal of things."

"We don't want to be treated worse than Mexico and Canada," he said, referring to two of the other big trading partners with the United States.

Meloni, in her first visit to the German capital since becoming Italian prime minister last year, urged "full flexibility" on using EU funds to boost the bloc's competitiveness. Meloni previously urged "caution" to ensure the EU's proposals do not weaken the bloc's single market.

MELONI DISAVOWS 'ALLERGY' REMARK

Though Meloni became prime minister as head of the most right-wing Italian government since World War Two, she has since struck a more moderate tone.

In 2019, she was quoted in a newspaper article as saying she was "allergic" to Germany but on Friday said she had no memory of making that remark.

"I have no memory of (having said) this ... I have said that German, among the languages I have studied, is the only one I have not been able to learn well," Meloni said.

Vowing a tough line on immigration, her government has tightened rules governing migrant rescues at sea.

"We can't allow immigration policy to be decided by people smugglers," Meloni said on Friday, adding that if illegal immigration could be halted there may be more scope to increase immigration by legal channels. She said she saw the possibility of an increased role for Italian consulates in Africa to handle immigration requests.

Scholz said it was important to find agreements with origin countries to return illegal migrants, but he added that the EU must keep legal channels for migration open.

(Reporting by Andreas Rinke, Angelo Amante, Gavin Jones, Thomas Escritt, Miranda Murray; writing by Matthias Williams; editing by Susan Fenton)

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