Deficit sinners test EU's new fiscal pact

(BRUSSELS) - As EU leaders sign a much-heralded "pact" on fiscal rigour Friday, two of the eurozone's top economies found themselves in hot water for fiscal indiscipline, including deficit hardliners the Dutch.

EU leaders meeting in Brussels for a two-day summit they hoped would cast in stone a new budgetary code were blindsided by admissions from the Netherlands and Spain that their deficits were in worse shape than previously believed.

Not slow to hand out lectures on keeping a lid on budgets that have ruffled feathers in Greece and elsewhere, the Netherlands announced its "provisional" public 2012 deficit would rise to 4.5 percent of GDP from 4.1 percent forecast before.

The figures sparked a pointed rebuke from the European Commission.

"We think that the Netherlands is one country that has been very vocal when supporting the reinforcement of our fiscal surveillance rules," said European Commission economy spokesman Amadeu Altafaj.

"So it's absolutely normal to believe that the Netherlands will apply this same approach to its own fiscal policies," added the spokesman.

Spurred on by domestic opposition to bailing out Greece, Dutch Finance Minister Jan Kees de Jager has been one of the most outspoken politicians on the debt crisis, recently saying confidence in Greek officials "had reached an all-time low."

Prime Minister Mark Rutte insisted that the Netherlands would make budget cuts "not because (EU Economic and Monetary Affairs Commissioner Olli) Rehn wants it" but because the Dutch government believes it "important."

And Spain, at the centre of the debt crisis with soaring borrowing costs that have since receded, had to explain why the country's 2011 public deficit estimate grew to 8.5 percent of gross domestic product from a previous forecast of 6.0 percent.

"Spain will fulfill its commitments regarding budget cuts, taking into account the fact that circumstances have changed," Finance Minister Luis de Guindos told reporters.

But, he added, "given the changed circumstances, it is foreseen that a process of negotiations will begin now. And here Spain is absolutely loyal and transparent regarding (fiscal) consolidation."

Renewed tensions over budgets could lead to a reawakening of uncertainty on the financial markets, warned analysts.

"We think there will be a certain, controllable, uncertainty on the markets over the theme of public deficits," said Gilles Moec, an economist at Deutsche Bank.

"This will arise from arguments between Spain and the EU over fiscal policy strategy, possible political tensions in Italy over labour market reforms and political uncertainty in France," added the analyst.

Fellow economist Thomas Harjes, from Barclays Capital, cautioned in a research note that fiscal consolidation would hamper growth in the short term.

Bond market pressures "could flare up again if the euro area's government leaders do not provide more clarity on how they intend to support member states who are going through this difficult but necessary adjustment process," he said.

The new disagreements came as EU leaders were due to ink with great fanfare a new German-inspired treaty on fiscal discipline designed to ensure that such a crisis does not occur.

The pact enshrines in each country's constitution a "debt brake" or "golden rule", meaning countries are supposed to limit their structural deficits to 0.5 percent of output.

The document was due to be inked on Friday by 25 of the 27 EU countries, with Britain and the Czech Republic having refused to take part.