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Spain deficit slippage ‘serious,’ could trigger fine: EU

Spain is hurtling towards an embarrassing test case of new EU budget rules and possibly big fine for a “grave” breach of deficit limits, the European Commission said on Monday.

The overshoot amounts to scores of billions of euros, and led analysts to warn that leaders may have signed away more sovereignty to Brussels than intended during the debt crisis and that the onset of recession risks derailing the implementation of new EU rules.

“We need to shed full light on what went on Spain in 2011,” EU Economy Commissioner Olli Rehn’s spokesman Amadeu Altafaj said of what he called a “serious, grave” gap in the figures.

Altafaj said Madrid notified Brussels on December 30 that it had overshot its 2011 deficit target by two percentage points, then two days ago that it was another half a percentage point higher.

Spain’s 2011 public deficit was supposed to come in at 6.0 percent of gross domestic product (GDP) but ended up at 8.5 percent, meaning the state spent 90 billion euros ($119 billion) more than it took in last year.

As a result, Prime Minister Mariano Rajoy said on Friday that Madrid could not hope to close such a huge gap to meet the 2012 target amid soaring unemployment and a deepening recession.

He did so hours after he and 24 other leaders signed a much-heralded EU treaty supposed to end EU states piling on debt.

The Spanish government is now forecasting a deficit of 5.8 percent in 2012, above an EU-agreed target of 4.4 percent.

The difference in the Spanish deficit would represent a sum not far short of the 90 billion for 2011 — not dissimilar to the size of the entire bailout agreed for neighbouring Portugal.

Rajoy fended off EU criticism on Monday, insisting Spain “scrupulously” respects its commitments.

“We are scrupulously fulfilling our commitments” on cutting the deficit, Rajoy told reporters in Madrid, stressing that Spain intends to lower its deficit to 3.0 percent of output in 2013.

“The timing and pace have been adjusted, but the ultimate aim has not changed, which is that in 2013 there will be a deficit of 3.0 percent of GDP,” Rajoy said.

European Commission head Jose Manuel Barroso insisted Monday, during talks in Vienna with Austrian premier Werner Faymann, that he had “no doubt that the Spanish government will honour its commitment.”

Behind the scenes, though, one key source said there is a growing likelihood that the Commission, awaiting April budget submissions, is “of a mind to negotiate nothing and simply open infringement proceedings.”

Analysts worried that the Spain case was a sign of “backpedalling” by leaders who “may have signed off more sovereignty than they have prepared their electorates for,” in the words of Sony Kapoor, head of economic consultancy Re-Define.

Altafaj said Rehn already asked Spain for “clarity” on the figures during talks among eurozone finance ministers last Thursday and is still waiting.

“It’s clear we need these hard figures, validated, in order to do a full assessment,” he said.

As a eurozone state, Spain risks a cash fine worth between 0.2 percent and 0.5 percent of GDP depending on the severity of the circumstances under new laws meant to tighten budgetary discipline that came into force at the start of the year.

“Once we have clarity,” Altafaj said of the detailed figures and analysis wanted in Brussels, “we will do our analysis and make our recommendations.

Rajoy has argued his new 5.8-percent goal was a “sensible” position to adopt, and two senior EU diplomats have suggested that Madrid could be allowed to postpone some of the toughest decisions on cuts to 2013.

One of these diplomats said to expect Madrid to slash its deficit from 8.5 percent of GDP to 4.4 percent as planned in one year would be “a rather steep reduction — probably simply not possible.”

This source said that Spain had indicated the problem lay with its autonomous governments, such as Catalonia or the Basque Country.

However, he also noted that “an underlying issue is that you shouldn’t have different rules for small and bigger countries.”

Eurozone and EU finance ministers are due to discuss Hungary’s slippage next week.

Missed targets there resulted last month in a recommendation by Rehn that 500 million euros in EU grants should be suspended next year unless corrective action is taken.

The Netherlands and Belgium have also opened political negotiations, with the two countries’ respective minority and coalition governments needing to find up to 17 billion and 2.0 billion in cuts this year.