EU Dodges Clash With Spain, Delaying Budget Sanctions Call

  • Spanish, Portuguese deficits will be reevaluated in July
  • Italy, Belgium and Finland given debt-reduction green light

The European Commission sidestepped a political conflict with Spain, postponing a decision on sanctions for budget violations until after the country’s general election.

The commission, the European Union’s executive body, has been vacillating for weeks over the situation in Spain with its own economists recommending punitive measures and on Wednesday said it would re-evaluate the budgets of Spain and Portugal in “early July” -- just after the Spanish vote on June 26. The commission gave both nations an extra year to bring their deficits below EU thresholds.

“We have concluded that this is not the right moment economically or politically to take these steps,” EU Economic and Monetary Commissioner Pierre Moscovici told reporters in Brussels. “These aren’t easy decisions to make.”

The intense debate within the commission over whether to punish Spain for its budget misdemeanors reveals the tightrope the EU’s unelected officials walk. While the decision may renew criticism that the bloc’s executive is too lenient toward the euro area’s largest economies when they violate its budget strictures, triggering sanctions weeks before a general election would have been controversial.

Despite last-minute tax cuts that saw Spain overshoot its deficit target by almost 1 percent of output, Acting Prime Minister Mariano Rajoy lost his parliamentary majority in December and has been clinging to power since then as he rivals failed to agree on a governing coalition. It’s the fourth successive year that Rajoy missed his deficit target.

Escaping for Now

The refusal to recommend sanctions against Spain and Portugal is part of a package of fiscal-oversight decisions that also conclude Italy, Belgium and Finland comply with the EU’s debt limit and Ireland, Cyprus and Slovenia should be removed from the excessive-deficit watchlist.

The decision means that Spain and Portugal have escaped, for now, being the first countries to receive an EU fine for breaching spending targets. While France, Italy, Portugal and Spain have all received warnings in recent years, the commission has found ways of extending deadlines and mitigating circumstances.

Spain’s deficit was 5.1 percent last year, compared with a target of 4.2 percent, a “non-negligible amount” according to European Commission Vice President Valdis Dombrovskis. The commission forecasts that Spain will miss its goal again in 2016 and has now given it until 2017 to hit the EU’s ceiling of 3 percent of gross domestic product. Portugal’s deficit was 4.4 percent last year; above the 2.7 percent target agreed with the EU and the commission is extending its deadline for deficit correction until 2016.

Italy, whose debt-to-GDP ratio is exceeded only by Greece in the euro area, received its own dose of generosity on Tuesday. The EU granted the government in Rome more leeway in meeting its deficit targets, allowing an extra 0.85 percent of GDP this year beyond its EU target, Dombrovskis and Moscovici said in a letter published on Italy’s Treasury website.

Before it's here, it's on the Bloomberg Terminal.