EC drops hint of relaxation of Spain’s deficit-reduction targets

The European Union's commissioner for economic affairs, Olli Rehn, on Monday indicated he might seek to cut Spain more slack over its budget deficit goals as the government's austerity drive caused the second recession the country has faced in three years to deepen.

"If there has been a serious deterioration in the economy, we can propose an extension of a country's adjustment path," Rehn said at a joint news conference in Madrid with Economy Minister Luis de Guindos. "That's what we did last year in the case of Spain."

The Commission gave Spain another year to bring the deficit back within the EU limit of three percent of GDP and staggered progress toward that. The target for 2012 is 6.3 percent of GDP, but Finance Minister Cristóbal Montoro has indicated that this goal might be missed.

Rehn said the regions are closer to meeting their deficit target figure, but declined to say whether the target for the whole of the public administrations would be met. The Commission is due to reassess Spain's financial situation on February 22.

The government estimates the economy contracted 1.3 percent last year, while the IMF expects output to shrink by 1.5 percent this year, compared with the administration's forecast of a fall of only 0.5 percent, a view shared by experts.

Rehn said it was essential that the restructuring of the Spanish financial sector be accompanied by measures to get credit flowing again and for borrowing costs to fall.

The commissioner said he saw some positive strides being taken toward a new productive model in Spain. He predicted another difficult year for the Spanish economy, with no room for "complacency."

The austerity drive needs to continue, Rehn said, adding that room also had to be made for measures that favor economic growth. "It is important that there is an appropriate and growth-friendly mix of expenditure cuts and tax increases," Rehn said.