States 'may get extra time to cut deficits'

Olli Rehn said countries could get extra time to meet deficit-cutting goals if the growth outlook deteriorates.

Olli Rehn said countries could get extra time to meet deficit-cutting goals if the growth outlook deteriorates.


Euro zone countries could get extra time to meet deficit-cutting goals if the growth outlook deteriorates, the EU's top economic official has told finance ministers, as data signalled the region was deeper in recession than previously thought.

Olli Rehn's comments, in a letter to European Union finance ministers dated yesterday and posted on the Commission website, came just as France admitted it was likely to miss this year's deficit goal of 3 per cent of GDP as its economy flounders.

A Spanish media report in December suggested the Commission may give countries such as France an extra year - until 2014 - and Spain even longer to meet deficit targets so that steep budget cuts do not stifle efforts to revive hard-pressed economies.

Data today showed both German and French GDP shrank more than expected in the last quarter of 2012, putting the euro zone economy on a shaky footing going into 20123.

The region as a whole slipped further into recession over the same period, contracting 0.6 per cent in the fourth quarter after a 0.1 per cent fall in Q3 GDP, although economists expect growth to pick up towards the second half of this year. The fourth-quarter figure was worse than the -0.4 per cent forecast by economists in a Reuters poll.

With many euro zone countries struggling to meet their nominal deficit targets, Mr Rehn said it was more important to focus on structural deficits, which reflect the underlying shortfall not affected by the swings in the business cycle.

"If growth deteriorates unexpectedly, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed structural fiscal effort," Mr Rehn said.

Mr Rehn's spokesman told reporters in Brussels that the letter was not aimed at any country in particular.

"Vice-president Rehn was reiterating an established position of the Commission. He wasn't making any new announcements. His remarks should not be seen as being related or being aimed at any member state in particular. To interpret them in that way would be an error," spokesman Simon O'Connor said.

"We do analyse the situation in every member state on an ongoing basis and we evaluate the appropriateness of the ... pace of fiscal adjustment as new information becomes available. The next checkpoint in this regard will be February 22nd when we publish our winter forecasts."

Mr Rehn, the EU's economic and monetary affairs commissioner, said the economic weakness was largely due to deleveraging after the build-up of private and public debt during the credit boom of the previous decade.

But he stressed that EU public debt had risen to 90 per cent of GDP from 60 per cent and that it was vital to bring this level down for sustainable growth.

"When public debt levels rise above 90 percent they tend to have a negative impact on economic dynamism which translates into low growth for many years," he said.


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