MercoPress. South Atlantic News Agency

Italy in recession; Greece receives bail out; Spain the new challenge

Prime Minister Mario Monti, working on reforms to boost growth

Italy is in recession, final data confirmed Monday. Italy's economy shrank 0.7% in the fourth quarter of 2011, following a 0.2% decline in GDP in the third quarter.

Mario Monti, who rushed through a 33 billion Euro austerity plan in December and is now working on reforms to boost growth, is due to meet Germany's Chancellor Angela Merkel for talks in Rome.

Italy's national statistics office ISTAT said GDP fell 0.4% year-on-year in the fourth quarter, revising a preliminary estimate of a 0.5% fall.

The data lagged a Euro zone average of -0.3% quarter on quarter and 0.7% year-on-year. Economic indicators are pointing to a further slowdown for most of 2012 in Italy, which has been the most sluggish economy in the euro zone over the last decade.

The Organisation for Economic Co-operation and Development said on Monday there were tentative signs of economic improvement in the Euro zone. The Bank of Italy forecasts a 1.5% full-year contraction in 2012, far steeper than the government's official projection of -0.4%.

Meanwhile Euro zone finance ministers gave their final approval to a second bailout for Greece on Monday and turned their fire on Spain, demanding it aim for a tougher deficit target this year in order to get back on target in 2013.

Greece, the source of the currency bloc's debt crisis, swapped its privately held bonds at the weekend for new, longer maturity paper with less than half the nominal value, a move that cut its debts by more than 100 billion Euros.

The exchange paved the way for Euro zone ministers to give the final political go-ahead to a 130 billion Euro package that aims to finance Athens until 2014. The decision will be formalised by junior officials on Wednesday.

But as Greece's financial problems have lost some urgency, Spain has raised a new challenge. After announcing the previous government had missed its 2011 budget deficit target by a significant margin, the new administration said it would not meet the EU-agreed deficit goal for this year either.

Spain was supposed to cut its deficit to 4.4% of GDP this year, but said it would only aim for 5.8% as it heads into recession. Its deficit in 2011 was 8.5%, far above a 6.0% goal.

In a statement, the Euro-group said Spain should strive for a 5.3% deficit target this year, cutting it some slack from the initial goal but keeping the pressure on.