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Spain wins extra time from EU in deficit war

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Spain wins extra time from EU in deficit war
The European Union has signalled a shift away from austerity-based policies. Photo: Matt May
15:44 CEST+02:00
The European Commission on Wednesday gave Spain extra time to trim its deficit as it laid down economic targets for EU nations that desperately need growth and jobs in the fallout from the debt crisis.

The crisis has seen Brussels gain additional powers to ensure EU member states toe the line to avoid future trouble — just as well, when 20 of the 27 have been put under surveillance for breaching the bloc's public deficit and debt rules, respectively at three percent and 60 percent of gross domestic product (GDP).

Spain, the Netherlands, Poland, Portugal and Slovenia should all be given extra time to cut their deficits, the Commission said, while recommending that Malta be placed under scrutiny and sharply criticizing Belgium for failing to do enough to trim its deficit.

Spain, which narrowly avoided a full-scale debt bailout last year, was given two extra years to bring its budget deficit into line at 2.8 percent of GDP by 2016.

Topping the problem list, France, the EU's second-largest economy struggling in recession, will have to step up the pace of reforms, including of its costly pension system, if it is to get back on track, the Commission said.

In the face of the debt crisis, EU governments opted initially for tough austerity measures but soaring unemployment and popular unease have switched the emphasis to growth now, rather than stabilizing the public finances.

For the Commission, this means a delicate balancing act between prudence and enforcing budget rules under its "Excessive Deficit Procedure" (EDP), while allowing governments the leeway they need to get their economies moving again.

In return, all these countries must commit to a series of general and specific reforms to improve economic efficiency and stabilize government finances, or face stiff fines.

On the other side, the Commission said Italy, along with Latvia, Hungary, Lithuania and Romania, have done enough to bring their budgets into line and so should be dropped from the poorly-marked nations on the EDP list.

Putting a country under the EDP gives Brussels added oversight of its economic policies, allowing it to make specific recommendations as to what it should do and with sanctions available to ensure that they are implemented.

Italy is forecast to reduce its public deficit to 2.9 percent of GDP this year and 2.4 percent in 2014.

However, Italy still has a massive accumulated debt ratio of 130 percent of GDP and must also account for how it plans to finance 10 billion euros ($13 billion) of new spending recently announced by new Prime Minister Enrico Letta.

The Commission said it added Malta to the EDP, leaving the list at 16 countries.

EU leaders are expected to discuss the Commission's recommendations at a summit at the end of June before they are formally approved later by finance ministers of the 27 EU member countries.

The call for reform comes as the OECD warned in its semi-annual outlook Wednesday that "protracted weakness" in the crisis-hit eurozone "could evolve into stagnation with negative implications for the global economy."

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