• No nation has been fined for breaching deficit rules
  • Decision on sanctions put off until after Spanish elections

The European Union’s reprieve for Spain and Portugal over their persistent breaches of deficit limits renews questions about the credibility of the bloc’s budget rules.

The European Commission on Wednesday delayed a decision on possible sanctions for the two countries until after Spain’s general election -- even after its own economic staff had recommended punitive measures and several commissioners argued against postponement.

“The Europeans have already diluted the stability rules once and now we are on track to do the same for a second time,” Javier Diaz Gimenez, a Madrid-based economics professor at IESE Business School, said in a telephone interview. “There isn’t such a thing as a good time to go ahead with sanctions; today it’s elections but tomorrow it will be something else.”

With Spain’s second election in six months scheduled for June 26, the commission skirted a politically sensitive ruling and extended its track record of not punishing countries that repeatedly breach debt limits. Germany and France teamed up in 2005 to dilute the rules after overstepping the limits for three years in a row and no country has been fined during the euro’s 17-year lifespan.

The threat of EU sanctions has certainly done little to curb caretaker Prime Minister Mariano Rajoy’s efforts to spend his way to an election victory in Spain. Rather than trying to persuade commissioners of his commitment to the “effective action” they’ve demanded, he was promising Spaniards more tax cuts this week if he can put together a government after June’s election.

Breathing Space

While Wednesday’s decision gives Spain some breathing space, fiscal hawks within the group of commissioners insisted that a decision should be made no later than early July, giving the EU’s finance ministers an opportunity to approve it at their meeting on July 12, according to an EU official, who asked not to be identified because the talks were private.

They also successfully argued that Spain and Portugal should receive a one-year grace period to get their deficits in line with the EU’s threshold of 3 percent of gross domestic product, rather than a two-year extension, which France was granted last year.

When Spain entered the EU’s Excessive Deficit Procedure in 2009 it was given until the end of 2012 to bring its shortfall below the 3 percent limit. Despite giving extensions on that time frame in December 2009, then 2012 and 2013, the commission is still waiting for Spain to meet its commitment.

The commission has the power to fine countries that persistently breach their deficit commitments by as much as 0.2 percent of GDP, withhold EU funds and send troika-style inspectors to scrutinize national officials. After the rules were weakened in 2005, the debt crisis prompted the EU to beef them up again in 2011 and 2013.

“The European Commission will probably again be criticized for being too lax on the euro zone’s fiscal rules,” Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt, said in a note. “At the current juncture, with most euro-zone countries desperately trying to revive growth and tackle unemployment, today’s decision was in our view the right decision.”

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