Spain warns it will miss 2012 deficit target

Associated Press
Spain's Prime Minister Mariano Rajoy speaks during a media conference at an EU Summit in Brussels on Friday, March 2, 2012. The leaders of 25 European states have signed a new treaty designed to prevent the 17 euro countries from running up huge debts in order to prevent a repeat of the current crisis afflicting the single currency zone. Of the 27 European Union states, only Britain and the Czech Republic decided not to sign the treaty. (AP Photo/Thierry Charlier)
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MADRID (AP) — Spain's prime minister said Friday that his recession-ridden country will miss its deficit goal for this year, risking sanctions from the European Union.

The announcement came as the government reported more grim economic news: a big rise in claims for jobless benefits last month and a new forecast that Spanish economic output will fall 1.7 percent this year, worse than the 1 percent forecast recently by the EU and the 1.5 percent predicted just weeks ago the Bank of Spain.

Unemployment — now at 22.9 percent — will hit an average 24.3 percent this year, the government said.

Spain's government deficit will reach 5.8 percent of economic output this year, Prime Minister Mariano Rajoy said after an EU summit in Brussels. That is much higher than the 4.4 percent Madrid had promised to the other states in the 27-nation bloc.

However, Rajoy said Spain still aims to cuts its deficit to 3 percent in 2013, which would bring the country back in line with the bloc's fiscal rules. He didn't say how his EU counterparts reacted to the higher deficit, but insisted that he was committed to austerity.

Rajoy's acknowledgment doesn't come as a surprise, as Spain sailed far past last year's deficit target. Instead of 6 percent of gross domestic product, the 2011 deficit reached 8.5 percent.

However, it puts Madrid on collision course with the EU and its partners in the euro currency union, which have focused on austerity as the best way of fighting off a crippling debt crisis.

Rajoy spoke in Brussels after a summit of European leaders. On the new deficit goal, he said "I did not consult other European leaders and I will inform the Commission in April," he said. "This is a sovereign decision by Spain."

In Madrid, Economy Minister Luis de Guindos announced the 1.7 percent GDP contraction forecast and said the economy will shrink in the first two quarters of this year and possibly in the third too, before starting to pick up. He blamed subdued domestic consumption, higher oil prices and a slower world economy.

He said unemployment will rise over the short term as labor market reforms passed by the new government take time to kick in and encourage employers to hire.

A spokesman for the European Commission said Friday that the EU's executive had not softened this year's goal.

"The excessive deficit procedure foresees a target of 4.4 percent in 2012," said Amadeu Altafaj Tardio. "Therefore our assessment is based on that target."

He also warned that Madrid could come under renewed market pressure if it fails to rein in its deficit.

"There is an issue of confidence at stake here," Altafaj Tardio said. He added that the Commission still wants Madrid to provide details on why last year's deficit was so much higher than expected — and what it plans to do about it this year — before the end of the month.

The Commission's reluctance to give Spain more leeway means the country risks being slapped with financial penalties of up to 0.2 percent of GDP.

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Steinhauser reported from Brussels.

(This version CORRECTS . Adds forecast for jobless rate. Corrects 1.5 GDP fall forecast attribution to Bank of Spain. This story is part of AP's general news and financial services.)

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