Brussels sees Spain failing to achieve deficit targets in 2012 and 2013

The European Commission on Friday predicted that despite a painful austerity drive, Spain will miss its deficit-reduction targets for this year and in 2013 as the recession currently under way extends into next year accompanied by high unemployment.

In its spring forecast for 2012-2013, the Commission predicted the shortfall on the government’s books would amount to 6.4 percent of GDP this year, compared with the government’s target of 5.3 percent. It estimates there will be only a slight improvement the following year when the deficit is seen at 6.3 percent. The government had been hoping to narrow the gap to 3 percent of GDP, the ceiling imposed by the European Union under the Stability and Growth Pact.

The Commission has indicated that it might be willing to give Spain and countries facing similar levels of economic stress more time to reach the 3 percent target. However, it is not expected to make a decision on this until the end of the month, and on whether or not to require more tax hikes or spending cuts.

“The Commission has full confidence in the determination of the Spanish government to meet the fiscal target in line with the pact,” said Olli Rehn, the EU commissioner for economic and monetary affairs, on Friday. “For Spain, the key to restoring confidence and growth is to tackle the immediate fiscal and financial challenges with full determination.

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

The EC tellingly entitled its individual report on Spain “Difficult times ahead.” It predicted GDP would shrink by 1.8 percent this year, largely in line with the government’s forecast, but estimated a further contraction of 0.3 percent next year when the administration is hoping for a timid recovery.

It expects unemployment to rise to 24.4 percent this year and to 25.1 percent the following year. That will continue to depress private consumption, which the Commission expects to be “very weak” this year.

Cuts in spending on healthcare and education worth some 10 billion euros imposed on the regions have sparked widespread discontent. Those came on top of tax hikes and severe cutbacks included in the 2012 state budget.

The government has already indicated that it may hike indirect taxes next year to help reduce the deficit. Spain’s standard value-added tax rate currently stands at 18 percent.

Portugal to see recovery next year

The Commission also forecasts hard times for Portugal this year when[/EMPTYTAG] the economy is expected to shrink 3.3 percent. However, it predicted a slight recovery the following year when GDP is set to expand by 0.3 percent.

It said preliminary data for the start of this year confirm that Portugal’s export growth had become more broad-based, with shipments to areas outside the EU partly offsetting a decline in those to the EU.

Unemployment next year is expected to slow to 15.1 percent from a forecast 15.5 percent this year.