Eurozone budget deficits to soar as economy shrinks

BRUSSELS Jan 19 (Reuters) - Budget deficits in euro zone countries will balloon this year as slower economic growth cuts government income and boosts spending, taking almost half of euro zone members above EU deficit limits, the European Commission forecast on Monday.

The European Union executive arm said that seven out of the euro zone's 16 members would have budget shortfalls greater than 3 percent of gross domestic product this year.

This would help boost the overall euro zone budget deficit to 4.0 percent of GDP in 2009, the highest since the euro zone was created, from 1.7 percent in 2008 and to 4.4 percent in 2010.

Economic and Monetary Affairs Commissioner Joaquin Almunia said however, that EU countries should make clear that they would shore up public finances once the recession is over.

"It is crucial that Member States explicitly commit that they will reverse the deterioration of public finances as soon as we return to normal economic times so as to ensure the medium -to-long term sustainability of public finances," Almunia said.

The Commission forecasts the euro zone economy will shrink 1.9 percent this year and grow only 0.4 percent in 2010.

It also forecast that government debt in the euro zone would jump to 72.7 percent of GDP this year from 68.7 percent in 2008 and increase further to 75.8 percent in 2010.

The total fiscal stimulus in the 27-nation European Union will amount to around 4 percent of GDP over 2009 and 2010, the Commission calculated, including both discretionary and automatic fiscal responses to the economic slowdown.

Ireland, where recession will strike hardest and the economy will contract 5 percent this year, will see its budget deficit rocket to 11 percent of GDP in 2009 and 13 percent in 2010 from 6.3 percent in 2008 and a surplus of 0.2 percent in 2007.

Spain will fare the second worst amongst eurozone members with a 6.2 percent budget gap this year against 3.4 percent in 2008, while France will have a 5.4 percent budget shortfall against 3.2 percent last year.

Germany, the euro zone's biggest economy, will remain below the 3 percent threshold this year with a deficit of 2.9 percent, but breach the limit in 2010 with a gap of 4.2 percent unless policies change, the Commission said.

Outside the single currency area, the Commission forecast that Britain would see surge in its budget deficit to 8.8 percent this year and 9.6 percent in 2010 from 4.6 percent in 2008 as its economy contracts 2.8 percent in 2009.

Romania will have a deficit of 7.5 percent this year and 7.9 percent in 2010 wile Latvia will see a 6.3 percent deficit in 2009 and 7.4 percent in 2010.

Under the EU's Stability and Growth Pact the Commission can start disciplinary procedures against countries which break the 3 percent of GDP limit and Almunia said it would discuss this on February 18.

He would not say which euro zone countries would be subject to disciplinary action, known as the excessive deficit procedure and which can eventually result in fines.

But he has previously said that while the Commission may start such action, the deadlines proposed for bringing deficits back within the 3 percent rule could be longer than usual due to the severity of the downturn.

(Reporting by Jan Strupczewski, editing by Ian Jones)