Euro zone budget gap to fall despite recession, Spain to miss targets

Most euro zone countries will reduce their budget deficits this year even though the recession in the single currency area is likely to continue but some, like Spain, will badly miss agreed targets, European Commission forecasts showed on Friday.

France and Portugal will also miss their debt targets, the EU's executive said. All three countries have already indicated as much and will now hope for more leeway from Brussels.

The European Union executive said the euro zone economy would shrink 0.3 percent in 2013 after a 0.6 percent recession last year, but the aggregated budget deficit will fall to 2.8 percent of GDP from 3.5 percent.

The euro slipped on the back of the forecasts.

The euro zone is consolidating its public finances to regain market trust after excessive government spending, real-estate bubbles and lack of competitiveness triggered a sovereign debt crisis that sent the euro zone into recession.

Under EU budget rules, sharpened at the peak of the crisis in late 2011, euro zone countries can face fines if they fail to take action to meet deficit reduction targets set by EU finance ministers.

Progress has been uneven among the 17 countries sharing the euro.

The main laggard was Spain, which badly missed the 6.3 percent of GDP deficit target for 2012 with a result of 10.2 percent. Even money the government spent on recapitalizing banks, the 2012 deficit is still well above target at 7.0 percent of GDP.

This year, Madrid will have a deficit of 6.7 percent rather than the 4.5 percent set for it by EU finance ministers. And unless policies change, Spain will have a gap of 7.2 percent in 2014 against the target of 2.8, the Commission said.

Euro zone countries whose economies perform much worse than expected can count on an extension of deficit deadlines.

But they need to show that while they missed the nominal deficit target because of recession, they have still cut the structural deficit, which strips out the effects of the economic cycle and one off effects.

Spain, in recession last year and seen shrinking again this, was asked last July to reduce its structural deficit by 2.7 points in 2012 to 4.3 percent of GDP and by a further 2.5 points in 2103.

Commission data showed, however, that the structural deficit reduction last year was half of what was agreed at only 1.4 percent taking the gap to 5.9 percent. This year the reduction will again be less than half of the target at 1.2 percent.

The euro zone's second biggest economy France will also miss its nominal deficit targets - this year's shortfall will be 3.7 percent rather than the 3.0 percent agreed with the EU.

But Paris almost hit its deficit target last year with a 4.6 percent gap against a goal of 4.5 and its growth was clearly weaker than expected with the economy stagnating last year and expected to barely grow this year.

Also, France cut its structural deficit by 1.2 percent in 2012 to 3.3 percent and will cut it again to 2.0 percent this year.

Portugal, which had to be bailed out by the euro zone and the International Monetary Fund in 2011, called for more time to reduce its deficit earlier this week.

Commission forecasts showed Lisbon's headline budget deficit rose to 5.0 percent of GDP last year from 4.4 percent in 2011 and will only ease to 4.9 percent this year, unless policies change.

The EU executive will only decide on whether to grant governments more time for adjustment, or step up punitive action, when more detailed figures are available in May.

(Reporting By Jan Strupczewski, editing by Mike Peacock)