Eurozone finance ministers called on Spain to make new cuts in its 2012 budget to reduce its deficit by another 0.5 per cent of economic output, a stinging rebuke to the new government of premier Mariano Rajoy, which publicly flouted Brussels-imposed deficit targets less than two weeks ago.

Despite the new cuts, Madrid will still be allowed to breach a previously agreed deficit limit of 4.4 per cent of gross domestic product this year by nearly a full percentage point; its new target will be 5.3 per cent, according to a senior eurozone official.

But that is significantly below the 5.8 per cent Mr Rajoy announced unilaterally after a summit of European Union leaders this month, and Jean-Claude Juncker, the Luxembourg prime minister who chaired Monday night’s meeting of finance ministers, said Madrid had agreed to stick to a 2013 target of 3 per cent.

Olli Rehn, the EU’s most senior economic official, said the slight loosening of this year’s deficit target was driven by an unexpectedly high deficit last year – at 8.5 per cent, it came in 2.5 percentage points higher than previously expected – and a deepening recession in Spain that forced his staff to rethink the targets.

“The growth prospects for Spain have been weaker, and because of that it is sensible from the point of view of [balancing] the need to restore confidence in Spanish public finances and to return to sustainable growth,” Mr Rehn said at a news conference following the six-hour meeting.

Still, Spain’s decision to keep to the 3 per cent deficit target by next year will require a Herculean effort over the next 20 months on par with some of the most drastic austerity measures imposed on the eurozone’s three bail-out countries, Greece, Ireland and Portugal.

Mr Juncker said the economic impact of such rapid slashing was discussed at the gathering with Luis de Guindos, the Spanish economics minister. But in the end, Mr Juncker said sticking to the 3 per cent goal was essential to maintaining the credibility of new EU rules in effect since the start of the year intended to rein in spending in the eurozone’s most profligate countries.

“I am concerned by the high level of unemployment in Spain and increased poverty factors,” Mr Juncker said. “But we agreed tonight Spain would stick to the target. It will be the responsibility of the Spanish authorities to decided on the initiatives that need to be taken.”

According to a senior eurozone official, Mr Rehn’s staff presented the 5.3 per cent target for 2012 to senior national finance ministry officials in a “options note” presented during a private meeting on Friday. The finance ministers’ endorsement appears to defuse, at least temporarily, a simmering row between Mr Rehn and Mr Rajoy over who has the authority to set national budget goals in countries under sanction for high deficit and debt levels.

Mr Rehn was also asked by eurozone finance ministers to prepare options for expanding the eurozone’s €500bn rescue fund by their next meeting, at the end of the month in Copenhagen. The request is the clearest sign yet that Germany, the last holdout, is prepared to increase the system’s total firepower to €750bn, and Mr Juncker predicted an increase would be agreed at the March 30 gathering.

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