Eurozone strugglers to win more time to cut their deficits

European Commission to extend deadlines as it slashes growth forecasts

Spain, Portugal and France are likely be spared pressure by Brussels to impose more austerity, despite forecasts yesterday from the European Commission showing that they will miss their deficit reduction targets.

Under the terms of the eurozone's new Fiscal Compact member states are required to limit their annual borrowing to 3 per cent of GDP. But in its winter forecast the commission said that Spain's deficit this year will come in at 6.7 per cent while Portugal's borrowing is expected to be 4.9 per cent. The deficit of France, the currency bloc's second largest member, is projected by the commission to be 3.7 per cent of GDP.

Despite this the commission's Vice-President Olli Rehn signalled yesterday that the organisation would refrain from using its powers under the Compact to levy fines on excessive borrowers and would instead give them more time to meet their fiscal commitments.

"In the case of Spain, it seems that the structural fiscal effort has been undertaken and that there has been also an unexpected shortfall of growth," he said.

Ministers from France and Portugal said yesterday that they would ask Brussels to push back their target by a year, as they pinned the blame for their respective borrowing overshoots on the weak eurozone economy. The commission now expects the eurozone to contract over the course of 2013. It slashed its forecast for growth for the 17-nation bloc to a 0.3 per cent contraction. Last autumn it had expected 0.1 per cent growth.

The decision on granting deficit reduction extensions will be taken by the commission in May, Mr Rehn said. States will need to show that they missed their targets because of the unavoidable costs of the eurozone's recession rather than a failure to rein in spending. In an encouraging sign for Paris, the commission's document noted that much of France's deficit overshoot is attributable to the recession. France is expected by the commission to grow by 0.1 per cent over 2013, when it previously expected growth of 0.4 per cent.

However, some prominent German voices yesterday called for a harder line to be adopted by the commission on deficits, particularly with regard to France. Jorg Asmussen, a German representative on the European Central Bank board, told Reuters that Francois Hollande's administration in Paris needed to do more to bring its spending into line with its revenues. "It's a matter of credibility that France takes appropriate steps as quickly as possible to correct this missing target", he said. Michael Fuchs, a senior member of German's Christian Democrats, referred to France as the eurozone's "problem child".

The Spanish government of Mariano Rajoy has pushed through a host of labour market reforms in the past 12 months, but Madrid's deficit in 2012 still came in 10.2 per cent thanks to a deep recession which has pushed unemployment up to 25 per cent. The Spanish economy contracted by 1.4 per cent in 2012 and is set to shrink by a similar amount this year, according to the commission.

Portugal, which has received a bailout from its eurozone neighbours, is seen as contracting by 1.9 per cent, following a 3.2 per cent shrinkage in 2012. France is expected to eke out its predicted 0.1 per cent growth following a flat 2012.

The commission's forecasts are bleakest for Greece, whose economy is seen shrinking for a sixth successive year in 2013.

It is expected to contract by 4.4 per cent, before finally managing a 0.6 per cent expansion in 2014. Greek un- employment is predicted to peak this year at 27 per cent.

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