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Spain busts EU budget treaty deal on day one

Spain’s prime minister, speaking the day he and 24 others signed a treaty to end debt excess, said Friday that Madrid cannot hope to close a huge gap to meet an EU-agreed deficit target for 2012.

Mariano Rajoy said, after a two-day European Union summit, that soaring unemployment and a deepening recession would force his government to spend tens of billions more than it raised in taxes.

Blaming over-optimistic forecasts by his Socialist predecessors, he said Spain’s public deficit would blow out to 5.8 percent of output in 2012, nearly twice the EU limit and well above the 4.4 percent level previously agreed with Brussels.

Spain’s 2011 public deficit was supposed to come in at 6.0 percent of gross domestic product (GDP) but that has jumped to 8.5 percent, with the state spending 90 billion euros ($119 billion) more than it took in last year, Rajoy said.

The turn for the worse in Spain, which is far bigger than twice bailed-out Greece, hung over talks that EU leaders hoped would help turn a corner in the two-year-old debt crisis.

Even hardline Netherlands had to move its fiscal goal posts, with its 2012 public deficit now expected to hit 4.5 percent, up from a previous estimate of 4.1 percent, sparking a pointed rebuke from the EU executive.

But Dutch Finance Minister Jan Kees de Jager told national public radio he would not go hat in hand to Brussels.

“I will not go beg in Brussels,” de Jager told Dutch public radio. “I always go with my head high, or else I do not go.”

Spain and The Netherlands could eventually face sanctions if the European Commission orders them to maintain pre-set targets, but Rajoy said his new goal was a “sensible” position.

Without giving a figure, Spanish Finance Minister Luis de Guindos said Thursday that “given the changed circumstances, it is foreseen that a process of negotiations will begin now” with Madrid’s euro peers and the Commission.

A high-ranking source who took part in the summit talks said Madrid would be given leeway to push back the brunt of the missing spending cuts to 2013 and so carry a higher-than-permitted deficit throughout the current year.

The news from Madrid and The Hague jarred at a summit scripted to be low-key and uneventful, marked by a decision to re-elect Herman Van Rompuy as EU figurehead and eurozone head for another 30 months, and the signing of the fiscal pact treaty.

On the eve of the talks, eurozone nations announced the clearing of most hurdles to an unprecedented 237 billion euro second bailout for Greece, which hinges on a debt write-down by private investors next week.

Only the Czech Republic and Britain refused to sign a pact that German Chancellor Angela Merkel, its main architect, said showed countries were “drawing lessons from the crisis” and re-building a “politically united Europe.”

In the treaty, governments promise to curb public deficits and keep debt from spiralling out of control but even its signatories acknowledge that what matters is implementation, a stance underlined by analysts.

The treaty “does not resolve the underlying solvency problem and lack of growth,” said CMC Markets trader Michael Hewson, adding that unless these issues were tackled, it would just “prolong the agony” for weaker states.

Commerzbank analysts said the signing ceremony would “provide an opportunity for the heads of government to display unity without actually solving any contentious issues.”

Leaders during the two-day talks also debated ideas for re-energising the EU economy — the world’s biggest single market — with French President Nicolas Sarkozy saying they were “turning the corner on the financial crisis.”

The eurozone will decide in late March whether to reinforce emergency funds designed to protect indebted countries from market speculation, Sarkozy said.

The subject was taken off the summit agenda owing to resistance from Berlin.