May 11, 2012 / 12:45 PM / 7 years ago

UPDATE 1-More angst for Spain as EU finds budget off target

* Spanish deficit seen well above targets this year and next

* France, the Netherlands may miss 2013 deficit reduction deadline

* Euro zone economy to grow 1.0 pct in 2013

By Jan Strupczewski

BRUSSELS, May 11 (Reuters) - Recession in Spain this year and next means the country will have to approve big additional savings on top of those it has already made if it is to meet its own ambitious budget goals, forecasts from the European Commission showed on Friday.

France, the Netherlands, Slovenia and Slovakia will also miss their 2013 deadline to cut deficits to 3 percent or less of gross domestic product unless they take action, according to the twice-yearly outlook for the 27-nation European Union.

Financial markets are particularly focused on Spain because of concerns that its public finances are unsustainable given the amount of government support that may be needed to bail out the banking sector, and its poor economic growth prospects.

In a ratcheting up of pressure, the EU executive said Spain will have a budget deficit of 6.4 percent of GDP in 2012 and 6.3 percent in 2013, unless policies change, far from targets of 5.3 percent and 3 percent respectively.

“Whereas the (5.3 percent) target of the central government should be within reach, deviations are projected at this stage for regional governments,” the Commission said.

“Moreover, the social security system is projected to record a deficit again this year in line with a deteriorating labour market outlook,” the forecast said.

The 5.3 percent figure was itself an increase from earlier projections for Spain, agreed by Spain’s new government to give it some leeway.

Missing the deadline set by EU finance ministers, unless the ministers believe it was justified, would entail financial sanctions for countries under new, sharpened EU budget rules.


Spanish regional budgets will be finalised by the end of May and EU Economic and Monetary Affairs Commissioner Olli Rehn said that only then would the Commission be able to say how much more austerity would be needed for Madrid to meet its goals.

“The Commission has full confidence in the determination of the Spanish government to meet the fiscal target in line with the pact. For Spain, the key to restoring confidence and growth is to tackle the immediate fiscal and financial challenges with full determination,” Rehn told a news briefing.

“This calls for a very firm grip to curb the excessive spending of regional governments.”

The Commission revised sharply down its economic growth forecast for Spain to a contraction of 1.8 percent this year from a 1.0 percent recession forecast in February, more pessimistic than Spanish government forecasts.

The Madrid government has also forecast economic growth of 0.2 percent in 2013, but the Commission expects it still to contract, by 0.3 percent.

The Commission projected that Spain will be the only euro zone country to be in recession next year, with the euro zone economy as a whole set to expand by 1 percent, after a 0.3 percent recession forecast for 2012.


France, where Socialist Francois Hollande won presidential elections last Sunday, would have a budget deficit of 4.2 percent in 2013, rather than the 3 percent it is aiming for, mainly because its economic growth next year would be slower than Paris expected, the Commission said.

It forecast 2013 economic growth will be 1.3 percent in France, while the government expects 1.7 percent.

Hollande, who campaigned under the slogans of shifting focus to growth from austerity, would therefore need to take new austerity steps.

“We are waiting for the French authorities to decide which measures will be introduced for 2013,” Rehn said.

The Netherlands, where the government has collapsed over a proposed austerity budget, will end up with a budget deficit of 4.6 percent next year, higher than the 4.4 percent expected this year, unless it adopts new measures, the Commission said.

The increase would occur despite a return to 0.7 percent economic growth in 2013 from a 0.9 percent recession expected this year. But Rehn noted the Dutch were already addressing the problem, praising the quality of the structural measures taken.

“The Commission forecast does not include the consolidation measures of last month’s budgetary agreement in the Netherlands, because this agreement was reached after the cut-off date of this forecast,” Rehn said.

Italy and Portugal were seen as on track to meet their targets.

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