EU Commission Seeks Sanction on Spain, Portugal on Deficits

  • Finance ministers to decide whether to go ahead with sanctions
  • Fines could be reduced, canceled on exceptional circumstances

Spain and Portugal were hit by a European Union move to fine them for breaching budget deficit limits in an unprecedented step to enforce rules designed to avert another debt crisis.

European finance ministers must now decide whether to back the proposal by the European Commission. Should the recommendation be approved, the commission would have 20 days to propose fines that could reach as high as 0.2 percent of gross domestic product, and a suspension of some regional funds. The penalties could be reduced or canceled for “exceptional” circumstances.

“The two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets,” Valdis Dombrovskis, a commission vice-president, told reporters in Brussels. “Reducing the high deficit and debt levels is a pre-condition for sustainable economic growth in both countries."

The EU is weighing the need to enforce budget rules against a backdrop of wider calls to rally support for the bloc following the U.K.’s decision last month to leave. Spain’s Acting Economy Minister Luis de Guindos has been adamant that sanctions would be unreasonable as the government is working to fix its economy after the financial crisis -- an argument countered by proponents of austerity.

“These rules contain some flexibility, but in this case the flexibility has been used up,” Jeroen Dijsselbloem, the Dutch finance minister who leads the group of his euro-area counterparts, said in The Hague earlier Thursday. “When I look at the numbers I really have to conclude that Spain and Portugal did too little.”

De Guindos told reporters in Madrid after the EU statement that he was convinced Spain wouldn’t be fined. He said Spain had made a “great effort” in bringing the deficit down and would set out a new path for tackling it.

Punishing the Iberian countries could be a contentious issue. That’s because while other countries including France and Italy have all received warnings in recent years after missing targets on deficit or debt, no country has so far been sanctioned. Populist parties have been making gains across Europe, a wave that’s been driven in part by a rejection of the EU’s supranational powers.

“Fines may not be the best way to punish countries that fail to deal with their expenditures -- they could make things worse,” Javier Diaz Gimenez, a Madrid-based economics professor at IESE Business School, said in a phone interview. “While public embarrassment alone won’t be enough to stop the spending, they also won’t want to give euroskeptic parties an opportunity to criticize the EU.”

Spain’s deficit was equivalent to 5.1 percent of its gross domestic product last year, compared with a target of 4.2 percent. Portugal’s shortfall ended 2015 at 4.4 percent, higher than the 3 percent threshold for countries to fall under corrective oversight known as Excessive Deficit Procedure. The average budget shortfall for the 28-country bloc was 2.4 percent in 2015, according to the EU’s statistics agency.

EU finance ministers have a meeting scheduled for July 12, when they may discuss whether to enable the commission to go ahead with the penalty procedure.

Since the rules were beefed up in 2011 and 2013 in response to the debt crisis, the commission has more powers to push for sanctions against member states including fining countries that persistently breach their commitments.

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. The bloc already gave extensions to that deadline in December 2009, 2012 and 2013. Portugal entered the process to adjust excessive deficits in 2009.

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