• Negotiations to begin on level of penalty, which may be zero
  • The two countries didn’t do enough to reduce deficit, EU said

European Union finance ministers ruled that Spain and Portugal violated EU spending limits in an unprecedented move that paves the way for negotiations over possible financial penalties.

The decision, taken in Brussels on Tuesday, triggers a period of 10 days during which Madrid and Lisbon can try to make a case for leniency from the European Commission. If they are successful, the commission could reduce the penalties to as low as zero, Commission Vice President Valdis Dombrovskis told reporters after the meeting.

Even though the EU decided neither nation did enough to narrow their deficits, “both countries have come a long way since the crisis; they managed to restore financial stability and they turned around economies through structural reforms,” Dombrovskis said.

The verdict underscores the EU’s dilemma when it comes to keeping euro-area countries’ spending on track. As populist voices grow louder across the bloc, the EU’s leadership knows the danger of intervening too forcefully in democratically elected governments’ budgets -- but at the same time, also know the rules are worth nothing if not enforced.

‘Bad Signal’

While the EU’s finance ministers agreed that Spain and Portugal haven’t done enough to reduce their deficits, many of them argued that the eventual fine should be minimal, with other governments facing similar problems. That decision will be left to the EU commission, which will announce its verdict in 20 days.

“A bad signal would be that we don’t respect rules any more in the euro area; another bad signal would be to punish for the pleasure of punishing,” French Finance Minister Michel Sapin told reporters in Brussels. The commission should “take into account the particular situation of 2015 and the considerable efforts that the Portuguese and Spanish people” have made over the past few years.

Technically any fine could be as high as 0.2 percent of the countries’ gross domestic product, with a possible freezing of EU funds of as much as 0.5 percent of their annual output. But with the penalty needing to be accepted by the bloc’s governments, the final punishment now looks more likely to be symbolic than punitive. As part of the negotiations, the two countries may commit to new budget targets, giving the EU some leverage in return for reducing the penalties.

Zero Fine

“It would be a very significant paradox if a fine was imposed on the economy which has experienced the most intense turnaround, has grown the most and is creating most jobs,” said Acting Economy Minister Luis de Guindos in a press conference in Brussels. “That’s the reason I am convinced that there won’t be a fine.”

With a 3.2 percent increase in gross domestic product in 2015, Spain is the fifth fastest-growing economy in the euro area. Spain’s deficit was equivalent to 5.1 percent of its gross domestic product last year, compared with a target of 4.2 percent. The commission scolded the country for relaxing its fiscal policy in 2015, an election year, saying the move had a “large impact” on the fiscal outcome.

Portugal’s shortfall ended 2015 at 4.4 percent, higher than the 3 percent threshold which triggers the corrective measures known as Excessive Deficit Procedure. The average budget shortfall for the bloc was 2.4 percent in 2015, according to the EU’s statistics agency.

Portuguese Finance Minister Mario Centeno said it would be “counterproductive” if the EU followed through with fines.

“We think the decision is unjustified given all the effort Portugal made in this period in terms of the budget and structural reforms,” he said.

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