EU warns Spain and Portugal to keep up level of budget cuts to curb deficits

EU warns Spain, Portugal to keep up budget cuts

BRUSSELS — The European Union’s executive has warned Spain and Portugal that they will have to keep up their painful budget cuts into 2012 to curb deficits and regain markets’ confidence.

In reports published Tuesday, the EU Commission says both countries’ pledges to make big cutbacks next year are in line with bringing their budget deficits down to the EU’s maximum of 3 percent of gross domestic product by 2013.

In May, Spain and Portugal were pressed into making major budget cuts by other EU nations, who were worried that the two eurozone nations’ heavy borrowings could force them to require bailouts to make debt repayments, as happened with Greece.

EU Commission President Jose Manuel Barroso told the European Parliament that government efforts to reduce debt were essential to restore confidence in Europe’s economy.

“Without confidence coming back to the financial markets in Europe, we will not be able to achieve that higher level of growth … that is why fiscal consolidation is so important,” he said.

The euro has slid by some 20 percent over the past six months and some eurozone governments are paying higher interest rates to borrow as investors remain wary of low growth prospects and mounting debt in many European states.

Greece’s credit rating was slashed to junk status by Moody’s Investors Service on Monday, the second of three major credit rating agencies to downgrade Greek bonds to junk after Standard & Poor’s did the same in late April.

The downgrade discourages investors from buying Greek bonds and makes Greek government borrowing more costly. The Greek finance ministry said the move didn’t take account of its recent moves to reduce public spending and raise income with a crackdown on tax evasion.

Spain and Portugal are trying to avoid the same fate. Spain has promised to reduce its 2011 budget by 1.75 percent of GDP, with Portugal saying it will reduce the budget by 1.5 percentage points.

The European Commission said the two countries were doing enough and their targets were “appropriately ambitious and imply substantial fiscal consolidation.”

“This assessment should be considered as early guidance for next year’s budget,” it said.

Officials are also denying reports in German newspapers that Spain may seek a bailout soon — or discuss one at June 17 talks between EU leaders in Brussels.

The head of the eurozone finance ministers’ group, Luxembourg Prime Minister Jean-Claude Juncker told reporters in Oslo that “there are no plans whatsoever to give support to Spain.”

A senior German government official told reporters in Berlin that “we believe the Spanish government is doing everything to deal with the situation and we have no doubt that it will do so successfully.”

The European Commission also Tuesday reviewed budget programs for Germany, France, Italy, Belgium, Ireland, the Netherlands, Austria, Slovenia and Slovakia — which all use the euro — and the Czech Republic, which still has its own currency.

It said it had called on most of them to spell out clearly the cutbacks they are planning for the coming years as they aim to bring deficits below the 3 percent limit. Belgium and Italy have a tighter deadline than the others and are supposed to reduce their deficits by 2012. Ireland has more time — until 2014 — and all the others have until 2013.

EU Economy Commissioner Olli Rehn said EU nations “need to coordinate better and more effectively” on how they run their economies, claiming this reinforced his proposals for tighter economic oversight, both by the EU executive and jointly by EU governments.

Associated Press writers Geir Moulson in Berlin and Valeria Criscione in Oslo contributed to this story.