Spain's prime minister says country will miss its 2012 deficit target, risking European Union sanctions; country's deficit will reach 5.8% of output this year, far higher than the 4.4% Madrid had promised

Cindy Allen

MADRID , March 2, 2012 (Associated Press) – 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 week ago by Madrid itself.

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 eurozone 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.

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, which currently has an unemployment rate of nearly 23 percent and a shaky banking sector, 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 sanctions of up to 0.2 percent of GDP.

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