Weak growth likely to win euro zone more time to cut deficits

Thu Feb 21, 2013 7:01pm EST

* EU executive to forecast gradual euro zone recovery in H2

* France, Spain, Portugal to miss nominal deficit targets

* EU to focus on structural deficit cuts, weak growth

By Jan Strupczewski

BRUSSELS, Feb 22 (Reuters) - Several euro zone countries are likely to miss deficit cutting targets because of a weak economy, the European Commission is expected to forecast on Friday, but they may be granted extra leeway rather than face disciplinary action.

The European Union executive will publish economic forecasts for the 27-nation bloc for 2013 and 2014.

They will shed light on how its members, especially the 17 that share the euro currency, are dealing with reducing borrowing to win back market confidence in the wake of the debt crisis, while also trying to stimulate economic growth.

However, the EU executive will only decide on whether to grant governments more time for adjustment, or step up punitive action, when more detailed figures are available in May.

Trust in the euro has been bolstered by European Central Bank pledges to do what it takes to defend its common currency but hopes the bloc might soon emerge from recession have been dashed by recent poor data.

In a letter to EU finance ministers last week, EU Economic and Monetary Affairs Commissioner Olli Rehn said growth in the euro zone is likely to turn positive only gradually in the second half of 2013, with job creation inevitably lagging.

Greece, Ireland and Portugal are bound by bailout agreements with international lenders to stick to agreed timetables of deficit reduction, or they risk that emergency loans would be frozen, as was in the case of Greece last year.

Other euro zone countries, including France and Spain, have to meet deficit targets under EU budget rules - the Stability and Growth Pact - to bring them below the EU ceiling of 3 percent of gross domestic product.

If they miss the targets because of bad policies rather than factors outside the government's control, they could face fines.

MORE TIME IS THE MORE LIKELY OPTION

France was to cut its budget gap to 3 percent in 2013 from 4.5 percent in 2012, but the goal was based on assumptions that the euro zone's second biggest economy would grow 0.2 percent in 2012 and 0.4 percent in 2013.

First estimates show that French GDP was flat in 2012, and French RTL radio reported that the Commission would say on Friday that growth in 2013 would be flat again, sending the deficit to 3.6 percent.

Yet Paris is unlikely to face fines, because while the EU sets the deficit target in nominal terms, the annual deficit change is set in structural terms to strip out the effects of the business cycle and one-off spending and revenue.

Otherwise, trying to cut the nominal deficit at a time when the economy is in a downturn could make things worse.

"If growth deteriorates unexpectedly, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed structural fiscal efforts," Rehn wrote in the letter to EU finance ministers.

Spain, Portugal and Greece already benefited from this approach last year getting more time to cut deficits.

The Commission forecast in November, France will have cut its structural deficit in 2012 and 2013 by 2.5 points in total to 2 percent of GDP - one of the biggest cuts in the euro zone.

Spain, in recession last year and this year and where more than a quarter of the workforce is without jobs, is likely to miss its 6.3 percent deficit target too, although not by much.

Prime Minister Mariano Rajoy said last month that Spain cut the structural gap by 3.5 points in 2012, more than called for under a July deal giving Spain more time to reduce its deficit.

EU Competition Commissioner Joaquin Almunia was reported last week as telling reporters that Spain has made sufficient progress in cutting its deficit and that "very probably" the country will get more time to reach deficit targets.

Another country which might get more time for deficit reduction is Portugal, where the economy contracted 3.2 pct in 2012 against a Commission forecast of 3 percent and the 2013 contraction is likely to be twice that previously forecast.

"It is reasonable to envisage that the European Commission will propose ... prolonging by one year the time given to Portugal to correct its excessive budget deficit," Finance Minister Vitor Gaspar told parliament on Wednesday.

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