By Robin Emmott
BRUSSELS (Reuters) - France and Spain fell short of their budget deficit goals last year, data showed on Monday, although the overall fiscal picture for the euro zone improved.
France's 2012 budget deficit was 4.8 percent of economic output, statistics office Eurostat said in the final reading of all 27 countries' public accounts. It compared with a target of 4.5 percent.
Spain's budget shortfall was 7.1 percent, excluding bank recapitalization, higher than the government's 6.98 percent official year-end reading and well above Madrid's original target of 6.3 percent.
Overall, the 17-nation euro zone looked much better off at the end 2012, however. Its combined fiscal deficit was 3.7 percent of gross domestic product, compared with 4.2 percent in 2011 and 6.5 percent in 2010.
Budget cuts are at the center of the euro zone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have no little hope of finding a job.
Crippling levels of unemployment and outbreaks of violence in southern Europe are now forcing something of a rethink, with the focus shifting to economic growth strategies.
Both Spain and France are expected to get more time to reach EU-mandated targets of 3 percent.
"We need to combine the indispensable correction in public finances, huge deficits, huge public debt... with proper measures for growth," the European Commission's President Jose Manuel Barroso said in a speech in Brussels just before Eurostat released its data.
EU leaders are desperate for economic growth as the euro zone struggles through its second consecutive year of recession, and some officials say they will back off from the spending cuts blamed for deepening Europe's economic downturn.
The Commission will decide on May 29 whether to recommend to EU finance ministers to give Paris and Madrid until 2015 to cut its fiscal gap to 3 percent of GDP, today targeted for 2014.
END OF AUSTERITY?
It is not yet clear how big a policy shift EU policymakers are planning.
EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in Washington on Thursday that financial leaders from the group of 20 economies calling for less austerity were "preaching to the converted."
Rehn says he is willing to grant more flexibility on fiscal targets to try to increase economic growth and is looking increasingly at countries' fiscal efforts in structural terms, which means removing the effects of the business cycle and one-off measures on the budget.
Germany and the European Central Bank still want to see the euro zone put its finances in order after a decade of borrowing that saw countries' debt and deficit levels rise dramatically.
In addition, the EU's Fiscal Compact treaty signed by all EU countries, except Britain and the Czech Republic, in March 2012 requires governments to keep the budget in balance or surplus with a structural deficit no higher than 0.5 pct of GDP.
"I can't see there's been a big change and that austerity is off the table," said Jurgen Michels, a senior economist at Citigroup in London. "Most countries will have to come out with additional, substantial fiscal measures in order to meet their new targets," he said.
Underscoring that, the task facing Spanish Prime Minister Mariano Rajoy remains daunting if he is eventually to bring Spain's budget deficit down to EU-mandated levels.
Adding in the cost of recapitalizing Spain's banks and a 40 billion euro ($52 billion) bank bailout from the euro zone, Spain's deficit was nearly 11 percent in 2012, higher than the European Commission's forecast of 10.2 percent, and an increase from the 9.4 percent deficit of 2011.
(Additional reporting by Martin Santa. Editing by Jeremy Gaunt.)