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Spain and Portugal Dodge EU Fine for Breaching Deficit Limit

Updated on
  • EU Commission cites past fiscal efforts, risk of backlash
  • New budget-deficit deadlines issued to both countries

Spain and Portugal avoided a landmark penalty from European Union authorities for persistently missing their budget targets with officials in Brussels opting for leniency amid rising populism and public discontent against austerity.

The European Commission decided not to impose sanctions because of the challenging economic environment both countries face, Economic Affairs Commissioner Pierre Moscovici said at a press conference in Brussels Wednesday. The Iberian nations could have been fined as much as 0.2 percent of their national output after finance ministers gave the EU executive their approval. Commission staff concluded that neither government had taken decisive action to correct their budget imbalances last year despite numerous warnings.

“Even symbolic sanctions wouldn’t have allowed us to correct what had happened in the past and would have been hard to understand by populations that have undertaken significant efforts in recent years,” Moscovici said. “A punitive approach we didn’t feel would have been most appropriate at a time when people are questioning Europe.”

The commission is trying to defend the credibility of the EU’s fiscal rules, even though breaches have consistently gone unpunished since the euro was introduced in 1999. Moscovici said officials had taken into account the sacrifices made by taxpayers in the two countries since their international bailouts during the financial crisis.

Under EU rules, member states are supposed to limit budget deficits to 3 percent of gross domestic product and keep their debt ratios below 60 percent. The Spanish shortfall came in at 5.1 percent last year compared with an agreed target of 4.2 percent as the government cut taxes in the runup to an election. Portugal ended the period at 4.4 percent -- also above the agreed limit.

Spain has vowed to rein in regional spending and raise an extra 6 billion euros ($6.6 billion) in annual corporate tax revenue by bringing forward the payment schedule while Portugal has pledged to freeze about 346 million euros in spending this year. Both nations have insisted they are “fully committed” to complying with common rules.

Obtainable Goals

Speaking after the decision was announced, Spain’s Acting Economy Minister Luis de Guindos said the latest fiscal goals set by the commission were obtainable, as he highlighted as priorities economic growth and the reduction of unemployment.

It would have been an error to punish Spain for last year’s deficit-target breach given the “tremendous” efforts undertaken by Spaniards at a time of crisis, Guindos said.

Portugal’s Foreign Affairs Minister Augusto Santos Silva told reporters in Lisbon that the decision was good news for his country and for Europe in general.

“Portugal is today on a clear route of budget consolidation, on a clear route of economic recovery and so any measure that would be counterproductive should be avoided,” he said.

— With assistance by Ian Wishart, Esteban Duarte, Henrique Almeida, and Joao Lima

(Updates with Luis de Guindos in seventh paragraph.)
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