By Robin Emmott
LUXEMBOURG (Reuters) - The euro zone believes Spain's budget cuts should take account of its recession, its economy minister said, as regional policymakers debated whether to let the country slacken the pace of its austerity drive.
The International Monetary Fund said late on Monday that Spain will miss the 2012 and 2013 deficit targets that it agreed with the European Union as the economy will contract far more next year than the country has forecast.
A senior euro zone official told Reuters that, given the growth outlook, there were concerns about Madrid's ability to meet its fiscal goals.
Those targets are seen as crucial to winning back investor confidence and avoiding being shut out of financial markets that are increasingly betting the country will need to tap some sort of emergency funding program.
Spain's new central bank head, who also said the government had used overly rosy GDP targets as the basis for its proposed 2013 budget, has taken the opposite tack by recommending even deeper austerity.
Speaking at an EU finance ministers' meeting in Luxembourg, Luis de Guindos brushed off those calls, saying the economic forecasts were not excessively optimistic, and that his counterparts in the euro zone had "absolutely not" pressed Spain for more cuts.
"There was a positive evaluation (by ministers of Spain's 2013 budget), of Spain's economic policy and the need to carry out a fiscal adjustment that is sensitive to the economic situation in the country," the minister told reporters.
At a time of escalating anti-austerity protests in Madrid, the Washington-based IMF said that the country's public deficit would reach 7 percent of GDP in 2012 and 5.7 percent in 2013.
That compares with European Union-agreed targets of 6.3 percent this year and 4.5 percent next.
TO CUT OR NOT TO CUT
A worsening outlook for Spain will add fuel to a debate about whether a German-led drive to cut deficits at a time of recession is the right approach to tackling the debt crisis, or if governments should give themselves more time to reduce their swollen debts and deficits.
The euro zone has already eased fiscal targets for Spain once this year, and the IMF has advised Britain, which is part of the EU but outside the euro zone, to scale back its fiscal tightening plans if growth does not pick up by early next year.
"I greatly respect the IMF forecasts ...but they are not written in stone," de Guindos said.
"Logically, we are working on the basis that such negative forecasts are not met."
The Spanish government has based its budget plan for next year on a recession of 0.5 percent.
The IMF, meanwhile, forecast the economy - crippled by a burst property bubble and the European Union's highest unemployment rate - would shrink 1.3 percent in 2013 and 1.5 percent in 2012.
The European Union's top economics official Olli Rehn, who polices Europe's debt- and deficit-cutting efforts, acknowledged that the economic downturn had made life difficult for countries in the Mediterranean, but urged them to stick to reforms.
"We know that we are currently in a mild recession in Europe," said Rehn, the EU's Economic and Monetary Affairs Commissioner. "But on the condition that the euro zone ...takes the necessary decisions in the coming period, then we will return more quickly to sustainable growth."
The European Commission releases its economic forecasts on November 7.
'DISSIPATE THE DOUBTS'
Spain's newly-appointed Central Bank Governor Luis Maria Linde warned last week that Madrid's proposed 2013 budget was based on rosy forecasts. Linde said the government, which has already hiked taxes and cut tens of billions of euros in costs, should consider further steps this year to meet next year's deficit target.
The IMF also said that Spain's debt will jump to more than 90 percent of gross domestic product in 2013 as the country recapitalizes its banking sector, but de Guindos again played down the forecasts.
"More than the projection, which is important, is to see how we are closing the Spanish macroeconomic imbalances," he said.
Investors say some kind of aid package is increasingly likely for Spain, which has also applied for a euro zone bank rescue, as the prolonged recession complicates efforts to cut government spending.
De Guindos declined to be drawn on whether Madrid would ask for a precautionary credit line from the euro zone.
"At this moment, the Spanish government will continue with reforms, continue with cutting the public deficit and after that dissipate all the doubts that exist about the future of the euro zone," he told reporters.
(Additional reporting by Luke Baker; Editing by John Stonestreet)