EU starts sanctions procedure against Spain over deficit

Eurozone finance ministers agreed Tuesday to officially begin a sanctions procedure against Spain and Portugal for doing too little to fix their rule-breaking deficits.

EU starts sanctions procedure against Spain over deficit
Photo: AFP

The ministers “found that Portugal and Spain had not taken effective action in response to its recommendations on measures to correct their excessive deficits”, a statement said.

The decision “will trigger sanctions under the excessive deficit procedure.

Spain and Portugal now have 10 days to lobby the EU to impose no penalty.

The European Commission, the EU's executive arm, will consider their arguments and must decide on sanctions within 20 days.

Under EU rules, the commission could impose fines of up to 0.2 percent of gross domestic product on eurozone countries that repeatedly ignore the deficit limits – but to date it has not dared to use its full power.

The ministers took the unprecedented step despite fears that too much austerity by Brussels will further stoke anti-EU populism after the Brexit vote.

“The rules are the rules,” said French Finance Minister Michel Sapin, ahead of the talks with his EU counterparts.

However, he said these should only be applied “intelligently” as he urged the EU to take the specific situation of each country into consideration.

Hit hard by the eurozone debt crisis, Spain and Portugal have been under the EU's excessive deficit procedure since 2009 because of recurrent fiscal holes..

'Enormous efforts'

Many EU powers, led by Germany, have long hoped for the commission to crack down on public overspenders, even amid the fallout of the British vote to quit the bloc and a poor economy.

French Finance Minister Michel Sapin said on Monday Portugal does not deserve punishment on its budget and argued the commission should take a light touch.

“Portugal has made enormous efforts in the past years. It does not deserve excessive discipline,” said Sapin ahead of the talks.

France's plea for leniency came after Germany recently warned Portugal against making “a serious mistake” by flouting the rules.

Those remarks by German Finance Minister Wolfgang Schaeuble angered Portugal, which summoned Germany's ambassador to Lisbon in protest.

“I think that we all agree… the rules must be applied,” Schaeuble said on Monday.

The often-broken rules call for budget deficits not to exceed 3 percent of gross domestic product.

'Sheer nonsense'

Spanish Finance Minister Luis de Guindos firmly defended his country's record, where the deficit was slashed from a towering 10.4 percent of GDP in 2012 to half that in less than four years.

“The reason I am optimistic is the sheer nonsense that a fine against Spain would signify,” de Guindos said ahead of the talks.

Under EU rules, the commission could impose fines of up to 0.2 percent of gross domestic product on eurozone countries that repeatedly ignore the deficit limits – but to date it has not dared using its full power.

Portuguese Prime Minister Antonio Costa warned last week that imposing a fine would only embolden euroscepticism in the wake of Britain's decision to leave the European Union if Brussels applies sanctions.

Spain and Portugal have been under the EU's excessive deficit procedure since 2009 because of recurrent fiscal holes following the global financial crisis.

Bailed-out Portugal, long considered a star reformer, also sharply cut its budget deficit from close to 10 percent of GDP in 2010 to 4.4 percent last year, but that still overshoots targets and the bloc's limit.

Spain, while avoiding a eurozone bailout, suffered through six years of recession.

In 2015 it reported a deficit of 5.1 percent of gross domestic product (GDP), still way off the target of 4.2 percent set by the commission and the normal 3.0-percent limit.

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Spain is officially off the hook over budget deficit breach

EU member states let Spain and Portugal off the hook on Tuesday, deciding against fines for their repeated breach of budget deficit rules meant to bolster growth and the public finances.

Spain is officially off the hook over budget deficit breach
Photo: AFP

EU Commissioner for Economic and Financial Affairs Pierre Moscovici said the decision reflected “an intelligent application” of the Stability and Growth Pact which sets the fiscal rules member states are supposed to follow.

The move confirms an earlier ruling by the EU Commission.

“By giving more time to Spain and Portugal to bring their public deficits below (the ceiling of) three percent (of GDP), the Council sets new credible fiscal trajectories, which will contribute to strengthening both their economies and the euro area,” Moscovici said in a statement.

“Stability and growth require a strong determination to put public finances in order. I trust that Spain and Portugal will respond accordingly,” he added.

The European Commission agreed late last month not to impose fines of up to 0.2 percent of Gross Domestic Product for fear of stoking even more anti-European Union sentiment in the wake of Britain's shock vote to quit the bloc.

The final decision rested with the 28 member states in the European Council where many such as France and Italy argued Brussels should cut them more slack as they try to get their economies back on track amid public anger at continued austerity.

Germany in contrast championed the SGP rules as the only way forward, saying that sound public finances are the only foundation for growth.   

After six years in recession, Spain reported a 2015 budget deficit of 5.1 percent of GDP, way off the 4.2 percent target set by the Commission.    

For this year, the Council said Madrid must find savings equivalent to 0.5 percent of GDP to bring the deficit down to 4.6 percent, and then 3.1 percent in 2017 and 2.2. percent in 2018.

“All windfall gains must be used to accelerate deficit and debt reduction, and Spain must be ready to adopt further measures should budgetary risks materialise,” the Council said in a statement.

“Fiscal consolidation measures must secure a lasting improvement of the government's budgetary balance in a manner conducive to economic growth,” it said.

Portugal must find savings worth 0.25 percent of GDP to bring its budget deficit to 2.5 percent this year, compared with 4.4 percent in 2015.   

The Commission last month warned both countries that should they fail to meet the new targets it would consider suspending their EU structural funds but this would be only at a later date and after discussion with the European Parliament.