Brussels drops another hint of cutting Spain more slack on deficit targets

The European Union commissioner for economic and monetary affairs, Olli Rehn, on Tuesday dropped another strong hint that Spain will be given more leeway to meet its public-deficit reduction commitments as the economy continues to languish in recession.

“If growth deteriorates in an unexpected manner, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed structural fiscal effort and does the necessary structural reforms to underpin medium-term stability and growth,” Rehn said in a speech delivered Tuesday in Brussels.

The EC is due on Friday to announce the budget deficit objectives for euro-zone member states. Last November, Rehn conditioned conceding further slack to Spain on meeting its obligation under the EU’s Stability and Growth Pact to bring its deficit began within the EU ceiling of three percent of GDP on the release of the budget execution figures for last year.

The Finance Ministry has yet to release the figures, but Brussels itself has acknowledged that the state is unlikely to meet the target of 6.3 percent of GDP for 2012, with experts expecting a figure of around seven percent, excluding the European bailout to recapitalize Spanish banks.

Brussels already relaxed the fiscal consolidation program for Spain last year, easing the target for 2012 to 6.3 percent from an initial 4.4 percent and gave the country until 2014 to meet the three-percent ceiling instead of this year.

After a meeting with Economy Minister Luis de Guindos in Madrid at the end of last month, Rehn said the Commission would look at the situation of each euro-zone member country to determine the appropriate pace of fiscal consolidation in order to maintain growth. The Spanish economy is expected to remain in recession this year, with the Commission expecting a contraction of almost triple the government’s forecast of a decline of 0.5 percent.

“We apply a differentiated approach to consolidation, taking into account the specific challenges of each and every member state when determining the structural fiscal adjustment effort needed,” Rehn reiterated on Tuesday.

Rehn indicated in January that the government of Prime Minister Mariano Rajoy may not be obliged to make further spending cuts this year, but would like to see further progress on structural reforms.