Spain deficit decision sparks Austria appeal

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By GABRIELE STEINHAUSER, Associated Press

BRUSSELS (AP) — The decision by finance ministers of the 17-country eurozone to give Spain some leeway on cutting this year's deficit has already triggered demands from other European countries for more fiscal leniency. The move also signals the difficulty Europe faces in enforcing the strict spending rules it has worked out over the past two years amid renewed recession.

Spain on Monday night was given the go-ahead by eurozone finance ministers to run a deficit of 5.3 percent of gross domestic product this year — above its original target of 4.4 percent.

However, Madrid still has to cut its deficit back to 3 percent by 2013, as had been planned.

The European Union's Economic Affairs Commissioner Olli Rehn, who is in charge of policing the bloc's fiscal rules, said the 2012 target had to be eased because Spain's 2011 deficit of 8.5 percent of GDP was much higher than expected and the country's economy is also doing worse.

Officials also insisted that Madrid was making far-reaching structural reforms, such as overhauling its labor market, in an effort to make its public finances more sustainable.

While many economists have warned that slashing Spain's deficit too fast could do more harm than good in the recession-hit country, the decision underlines how difficult it will be for the currency union to stick to the steep austerity measures it has chosen as its main weapon against its debt crisis.

It also gives other states with high deficits and struggling economies ammunition to ask for more leniency after Europe spent much of the past two years drawing up stricter rules against overspending.

The first such demand already came Tuesday, when Austria's finance minister said Hungary should also be given more time to get its finances in order.

"Looking at comparability, we have to treat all states equally," Maria Fekter told journalists. "Yesterday we had a very intensive debate on Spain, and for Spain we didn't immediately march up with sanctions."

As a euro member, Spain's debt problems risk spilling over to the rest of the currency union. The country has already received some financial support, albeit indirectly from the European Central Bank buying its bonds and propping up financial institutions.

"Yesterday's decision shows that the Eurozone is increasingly being torn between the strict-austerity-and-rules-based approach and a more growth-oriented approach," Carsten Brzeski, an economist at ING in Brussels, said in a note.

Brzeski said the "discussion on Spain was probably only the tip of the iceberg," adding that eight other euro countries will have to bring their deficits down below 3 percent by 2013. "Except for Germany, most other countries are still far off from reaching this target," he said.

Hungary, which is part of the European Union but does not use the euro, faces losing access to euro495 million ($649 million) in EU development funds next year because its deficit looks likely to run above the 3 percent limit again in 2013. In 2011 Hungary managed to bring government spending in line with EU rules only because of several one-off measures, including the nationalization of pension funds.

But Fekter said that the bigger pressure on Hungary may be partially motivated by the country's politics, which have raised red flags in Brussels for violating civil liberties as well as EU rules on central bank independence.

"Regarding the pressure that is being exerted on Hungary, I do have the feeling that double standards are being applied," Fekter said.

EU finance ministers are expected Tuesday to decide on withholding the development funds — with some 0.5 percent of Hungary's GDP — and demand further cuts this year.

There are obvious differences between the Spanish and Hungarian economies. While Hungary has broken the EU's deficit rules every year since it joined the bloc in 2004, Spain was a model student until a collapse in its real-estate market amid the 2008 financial crisis ran its economy into turmoil. Madrid has also promised to meet the 2013 target of 3 percent and take further action this year, while Budapest has resisted taking new measures.

On top of that, Hungary has — for the second time in less than five years — requested financial help from the EU and the International Monetary Fund and a runaway deficit could lower the chances of the two institutions to get their money back.

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