EU Weighs Crackdown on Budget Busters With Credibility at Stake

  • Commission inspectors seen ready to propose penalty for Spain
  • Political concerns may persuade EU to avoid punishments

Euro nations’ persistent breaches of deficit limits are putting the bloc’s budget enforcers in a bind, as they weigh the political costs of imposing sanctions for the first time ever in order to maintain the credibility of the budget rules.

Spain is the most immediate problem. The European Commission confirmed Thursday that the government blew out its 2015 target with a raft of pre-election tax cuts.

The commission is giving serious consideration to penalizing Spain and technical staff may push that process forward next month by recommending sanctions, according to two people familiar with the issue. One of the people said the political decision that comes next is not so clear cut, because punishment for Spain would mean stepping up measures against Italy too. And then there is France. The euro area’s second-biggest economy hasn’t met the 3 percent deficit limit since 2007.

While France, Italy and Spain have all received warnings under the so-called Stability and Growth Pact in recent years after missing targets on deficit or debt, no country has so far been sanctioned. As each successive violation goes unpunished, doubts grow about whether the bloc can really muster the political will to enforce its own rules, even after the debt crisis pushed several members to the brink of default.

“The commission faces the risk of leaving the growth and stability pact looking empty again,” said Javier Diaz Gimenez, a Madrid-based economics professor at IESE Business School. “The staff really want to go ahead with the step up of the excessive deficit procedure, the key is whether commissioners would let it happen.”

Spain missed its 4.2 percent deficit target for 2015 by almost 1 percentage point of output. European Commission Vice President Valdis Dombrovskis said that was a “non-negligible amount” at a press conference in Brussels this week while insisting that no decision had been made on potential sanctions. A spokeswoman for the commission reiterated Dombrovskis’s position when asked to comment Thursday.

The commission forecasts that Spain will miss its goal for a ninth straight year in 2016. Italy has managed to keep its deficit under control but has the biggest debt pile in Europe after Greece and its liabilities have been rising for the past three years, stretching the EU rules.

The EU is trying to uphold its debt and deficit rules as European Central Bank President Mario Draghi calls on governments to take the difficult decisions required to foster growth in the 19-country bloc and populists and Euroskeptic political parties exploit voters’ dissatisfaction with the economic situation. Spain and Italy failed to meet their commitments even as the Frankfurt-based central bank’s 1.7 trillion euro bond-purchase program reduced their interest burden to a fraction of the levels seen in 2012.

The commission has the power to fine countries that persistently breach their deficit commitments up to 0.2 percent of their gross domestic product and send troika-style inspectors to scrutinize national officials after the rules were beefed up in 2011 and 2013 in response to the debt crisis. Any decision by EU commissioners would have to be ratified by EU finance ministers.

The commission will decide what to do in next month, a particularly tricky time for Spain, with the country likely to be preparing for a repeat election after December’s inconclusive ballot left the country without a proper government. Before then, national governments have to submit their reforms plans by the end of this month and the commission will produce its economic forecasts in early May.

Spain’s caretaker government this week acknowledged that the country won’t meet the EU’s 3 percent deficit threshold this year and last month the commission told Spain it has to “step up efforts to ensure compliance” with its deficit goals.

At the same time, Economic Affairs Commissioner Pierre Moscovici told Spanish lawmakers at the European Parliament in Strasbourg, France, that he understands the country will need more time to meet its deficit goals. It’s possible for the commission to push back Spain’s deficit targets and sanction the government at the same time.

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