EU Economic and Monetary Affairs Commissioner, Olli Rehn, said Brussels was ready to give Spain an extra year until 2014 to bring its deficit down to the EU limit of 3 per cent of gross domestic product, if Madrid presents a solid two-year budget plan for 2013-14, something it has committed to do.
The concession, which Madrid has not publicly requested, was on condition that Spain effectively reins in overspending by its autonomous regions, makes further financial sector reforms, and recapitalises its troubled banks.
Rehn said there were no grounds for giving Italy a similar extension to balance its budget, due in 2013, since unlike Spain its economy is forecast to start growing again next year.
In an economic policy document which laid out some of the dramatic policy proposals which analysts say are needed to tackle the debt crisis, the European Union's executive arm said the vicious circle of weak banks and heavily indebted states lending to each other must be broken, and called for a banking union in the eurozone.
"In the same vein, to sever the link between banks and the sovereigns, direct recapitalisation by the ESM (European Stability Mechanism) might be envisaged", the report said.
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