(CN) – Spain will get an extra year to bring its budget deficit below EU targets, the European Council announced Tuesday, citing “adverse economic circumstances.
The decision marks the second deadline extension for Spain since the commission ordered a deficit reduction plan in April 2009. The first extension came in December 2009 after Spain’s deficit was poised to reach 11.2 percent of gross domestic product – five points higher than previous estimates.
Spain’s economy has been especially hard-hit in the worldwide economic crisis, with 24 percent unemployment in the first quarter of 2012 dragging down economic activity, tax revenues and the government’s budget. Forecasters expect the country’s unemployment will hit 25 percent in 2013 – roughly the same rate experienced in the United States during the Great Depression. Already more than 50 percent of Spanish young people are out of work.
“Although Spain has taken effective action to comply with the council’s recommendations, the latest commission projections indicate that its general government deficit is likely to amount to 6.3 percent of GDP in 2012, compared to the expected 5.3 percent cited in its stability program and budget law,” the European Council said in a statement. “And a further deepening of the economic crisis and implementation risks at regional level could imply an even larger deviation.”
The European Commission projects Spain’s national debt will exceed 80 percent of its GDP in 2012 and will head toward 90 percent by 2013 without implementation of drastic policy changes, according to the council.
The debt ratio increases stem largely from higher interest payments after Standard & Poor’s downgraded the country’s credit rating this past April.
In addition to achieving 2 to 3 percent of GDP improvement on structural deficits per year through 2014, the council also wants Spain to “underpin the credibility of its consolidation effort” and relieve market pressure on its debt by adopting budgets for both 2013 and 2014 within the next few weeks.
Legislators also expect reports on the progress of Eurogroup’s bailout of the Spanish banking sector every three months, according to the statement.
Spain must establish an independent institution to provide analysis and advice, as well as monitor fiscal policy, the council concluded. It has three months to comply with all of the decisions.