BRUSSELS (Reuters) – Spain will have to approve big additional savings this year and next if it is to meet its ambitious deficit reduction targets as the Spanish economy will be in recession in 2012 and 2013, forecasts from the European Commission showed on Friday.
In its twice-yearly economic outlook for the 27-nation European Union, the EU’s executive said Spain will have a budget deficit of 6.4 percent of gross domestic product in 2012 and 6.3 percent in 2013, unless policies change.
Spain has vowed to bring the budget shortfall down to 5.3 percent this year from 8.5 percent in 2011 and, unless EU finance ministers give it more time, to reduce it to 3 percent in 2013 if it wants to avoid financial sanctions.
“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.
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“This reflects the standard no-policy-change assumption and the fact that not all consolidation measures at regional level for 2012 have been specified yet,” it 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 Commission revised sharply down its economic growth forecast for Spain to a recession of 1.8 percent this year from a 1.0 percent contraction forecast in February.
The Spanish government has forecast the economy will grow 0.2 percent in 2013, but the Commission forecast it would still contract by a further 0.3 percent next year.
EURO ZONE TO GROW IN 2013
The Commission projected that Spain will be the only euro zone country to be in recession next year and the euro zone economy as a whole is to expand by 1 percent, after a 0.3 percent recession forecast for 2012.
“A recovery is in sight, but the economic situation remains fragile, with still large disparities across Member States,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
The aggregate euro zone budget deficit will shrink this year to 3.2 percent from 4.1 percent in 2011 and to 2.9 percent in 2013.
“We are witnessing an ongoing adjustment of the fiscal and structural imbalances built up before and after the onset of the crisis, made worse by the still weak economic sentiment,” he said.
“Without further determined action, however, low growth in the EU could remain. Sound public finances are the condition for lasting growth, and building on the new strong framework for economic governance, we must support the adjustment by accelerating stability and growth-enhancing policies.”
GREECE, IRELAND AND PORTUGAL
Greece, which started the euro zone sovereign debt crisis in 2010 and which now depends on EU/IMF financing, is expected to have zero economic growth in 2013 after a 4.7 percent contraction this year, its fifth year of recession.
The Greek budget deficit should fall to 7.3 percent this year from 9.1 last year, but unless Greece passes further legislation to reduce the shortfall further, the gap will widen back to 8.4 percent next year, the Commission said.
Portugal, which like Greece is on a EU/IMF financial lifeline after losing market confidence, will be close to meeting its deficit targets this year and next, with a gap of 4.7 percent in 2012 and 3.1 percent in 2013, the forecasts said.
Portugal’s economy is to contract 3.3 percent this year, after a 1.6 percent recession in 2011, but grow again by 0.3 percent in 2013.
The third euro zone country using EU/IMF aid, Ireland, will grow 0.5 percent this year after 0.7 percent growth in 2011 and accelerate to 1.9 percent in 2013. The country is to bring down its budget deficit to 8.3 percent this year from 13.1 percent last year and to 7.5 percent in 2013.
(Reporting By Jan Strupczewski; editing by Luke Baker)