The European Commission has said Spain, France and Portugal have failed to cut overspending to agreed targets.
Spain’s government deficit was 10.2% of the country’s economic output in 2012, well above the agreed 6.3% target, and will stay far above target into 2014.
Meanwhile, the Commission joined other major international organizations in admitting that the eurozone economy would contract in 2013.
It is forecast to shrink 0.3%, making the governments’ task even harder.
Previously, the Commission had expected the 17 economies in the eurozone would collectively enjoy 0.1% positive growth this year.
Delivering its winter forecast, Commission Vice-President Olli Rehn said that the eurozone was nonetheless expected to rebound in the last three months of this year, registering 0.7% growth in the fourth quarter.
The Commission is concerned about a “surprise” fall in Portugal’s economy, which fell 3.2% in 2012 and is forecast to contract by another 1.9% in 2013.
The European Commission joined other major international organizations in admitting that the eurozone economy would contract in 2013
Most economic forecasters have been revising down their European growth estimates, after the global economic recovery showed signs of faltering in the final quarter of 2012.
For example, in January the International Monetary Fund (IMF) said it expected the eurozone to fall into “mild recession” in 2013, having previously predicted growth.
It also predicted that the UK would grow 1% in 2013, compared with the 1.1% previously forecast.
The World Bank also revised down its global growth forecasts earlier in January.
But European Central Bank (ECB) president Mario Draghi believes the eurozone will begin recovering in the second half of this year.
And this week, Germany’s Bundesbank said Europe’s biggest economy would avoid recession and return to growth in the first quarter of 2013, after shrinking 0.6% in the last three months of 2012.
It expects Germany to continue growing throughout 2013.
Spanish Economy Minister Luis de Guindos has dismissed talk of it seeking a bailout from the International Monetary Fund (IMF) as “senseless”.
And the IMF denied that Spain had asked to discuss rescue loans.
The IMF has contributed to bailouts of all the other eurozone nations, such as Greece, that needed help.
Meanwhile, the European Central Bank (ECB) president Mario Draghi described the current set-up of the eurozone as “unsustainable”.
There were rumors that Spain had already gone to the IMF, after the Spanish deputy prime minister went to meet the IMF’s managing director Christine Lagarde.
Spanish Economy Minister Luis de Guindos has dismissed talk of it seeking a bailout from the IMF as senseless
“My desire is to not come out and deny these rumours because they are senseless,” Spanish Economy Minister Luis de Guindos said on Spanish television.
Spain has taken Greece’s place as the epicentre of the eurozone crisis as concerns over the health of Spanish banks have shaken markets.
Bankia, Spain’s fourth largest bank, has asked for another 19 billion Euros recently from Madrid, but many question whether Spain will be able to afford it.
Speaking to the European Parliament, Mario Draghi said: “Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no. Can the ECB fill the vacuum of the lack of action by national governments on the structural problem. The answer is no.
“The next step… is to clarify what is the vision a certain number of years from now. The sooner this is specified, the better it is.”
And EU economics commissioner Olli Rehn said more austerity was needed if the eurozone was to avoid disintegration.
Olli Rehn talked down the idea of European states issuing joint bonds, saying that austerity and closer co-operation were needed.
“We need a genuine stability culture and a much upgraded common capacity to contain common contagion,” he told a conference.
New figures also showed eurozone inflation slowed more than expected this month.
Inflation in the 17 countries that use the euro eased to 2.4% in May from 2.6% in April.
The figure is still above the ECB’s target to keep inflation below 2%, but the lower-than-expected number could fuel calls for an interest rate cut next week.
In other figures released on Thursday, Germany’s unemployment rate fell below 7% as Europe’s biggest economy continued to perform strongly.
The jobless rate dropped to 6.7% in May, from 7% in April, as the number of people unemployed fell by 108,000 to 2.86 million.
However, there was more bad news from Greece as figures showed that Greek retail sales volumes fell by 16.2% in March compared with a year earlier. This followed February’s decline of 12.9%.
The European Commission warns Hungary that it faces legal action if it fails to change reforms to its central bank, data protection and judiciary.
Hungary’s PM Viktor Orban was given a month to respond, Reuters news agency reports.
Critics say the new central bank law puts the bank’s independence at risk. It allows Viktor Orban to install a new deputy governor.
Viktor Orban’s conservative Fidesz party has a two-thirds majority in parliament.
The European Commission launched an “infringement procedure” against Hungary on Tuesday, the first stage of which is a warning calling for changes to the controversial laws.
“We do not want a shadow of doubt on respect for democratic principles and values to remain over the country any longer,” Commission President Jose Manuel Barroso said.
There are fears that a new data protection authority will come under Fidesz influence and that a plan to make hundreds of judges retire early will undermine the judiciary’s independence by enabling new pro-Fidesz appointees to replace them.
The European Commission can go as far as imposing fines and taking Hungary to the European Court of Justice.
Thousands of Hungarians have demonstrated over what they see as Fidesz authoritarianism. A new media authority set up by Fidesz is also highly controversial.
The changes are part of a new constitution which took effect on 1 January.
Viktor Orban says the criticisms are politically motivated. He argues that partisan bickering has for too long handicapped Hungarian politics and that the last vestiges of communist influence need to be rooted out.
Correspondents say a compromise may be found because Hungary is struggling to service its debts and wants to reach a new deal with the EU and International Monetary Fund on a standby loan.
Hungary’s total debt has risen to 82% of its output, while its currency, the forint, has fallen to record lows against the euro.
The EU Economic and Monetary Affairs Commissioner, Olli Rehn, has already warned that Hungary could face a suspension of EU cohesion funds – support for regional projects.
Nearly a year ago a row between Hungary and the Commission was defused when Viktor Orban’s government agreed to amend the wording of the new media law, in the sections on balanced reporting, country of origin and media registration.