Spanish Slapdown Shows Timing Matters When Breaking EU Rules

Spain might justifiably claim to be the victim of unfortunate timing and an arbitrary application of rules.

Under European Union principles, countries should keep their budget deficits below 3 percent of gross domestic product.  This matters now more than ever, because persistent infringements of the EU’s rules on budgets have helped erode confidence in the bloc and its currency, the euro. What the euro area needs now more than anything is confidence that it will survive.

Spain has breached the measure every year since 2008 — a total of eight times. With neighboring Portugal falling short 15 times, it can't come as a total surprise that the two are about to become the first EU nations to be slapped with a fine for running an excessive deficit.

But wait — they’re certainly not alone in missing the mark.

Eurostat data since 1999 analyzed by Germany’s Ifo Institute shows that France has failed to adhere to the 3 percent threshold 12 times, while Italy and Germany have done so nine and seven times, respectively. If you subtract “allowed” breaches — misses are acceptable if a country is in recession — Spain’s number falls to 4 and Portugal’s to 10, while France clocks in at 11, Italy at 8 and Germany at 5.

So, why are Spain and Portugal getting punished? The two nations are seen by EU authorities as having failed to make a “significant” effort to reduce their respective shortfall, with the actual deficit numbers being among the furthest off target. And that comes after the EU strengthened fiscal rules in the aftermath of the crisis. Missing targets now is more significant than it was just five years ago when countries were given leeway on deficits. Hence the spotlight on offenders.

Still, that doesn't quite explain France. The country, whose deficit came in at 3.5 percent of output last year, missed the EU threshold — and has done so every year since 2010. But the European Commission has given the French government more time before considering penalties. 

“There's a lesson for Spain to be learned in this,” said Vincenzo Scarpetta, a policy analyst at Open Europe, a research institute in London. “The French government has always been able to make some kind of pledge, promise additional measures, and has made it clear to the Commission that their priority is growth over the deficit. Spain, being the fourth largest economy in the euro zone, could have been more forceful.” 

Overall, the EU has show leniency at times. Since 1999, countries have failed to comply with deficit goals a total of 165 times, according to the Ifo, of which 114 occasions weren't covered by the recession exemption. If you go by the latter measure, France is the bloc’s worst offender, ahead even of Greece.

--With assistance from Jeff Black.

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