Under bloc regulations, the EU executive could have imposed fines of up to 0.2 percent of national gross domestic product (GDP) against Madrid and Lisbon – but instead showed clemency amid growing anti-Brussels sentiment highlighted by Britain's Brexit vote.
“Sanctions, even symbolic ones, would not have been understood by the public,” the EU's economic affairs commissioner, Pierre Moscovici, said at a news briefing.
“It is not the best approach at a time when doubts are widespread in Europe,” he added.
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The EU has to date not dared to use its full powers against eurozone overspending for fear of triggering a populist backlash and given the opposition of chronic overspenders such as France and Italy.
Triggering the sanctions process has been the long desire of Germany, which was instrumental in giving Brussels the new powers to enforce strict budget discipline.
Spain and Portugal have been under the EU's excessive deficit procedure since 2009 because of recurrent fiscal holes.
Bailed-out Portugal, long considered a star reformer, sharply cut its budget deficit from close to 10 percent of annual economic output in 2010 to 4.4 percent last year, but that still overshoots the EU's 3.0 percent target.
Spain, while avoiding a eurozone bailout, suffered through six years of recession.
In 2015 it reported a deficit of 5.1 percent of GDP, way off the 4.2 percent target set by the Commission.
Instead of fines, commissioners decided to explore the possibility of suspending EU structural funds to Spain and Portugal next year if budget remedies are not provided “as soon as possible”, Moscovici said.
These funds are used to address regional disparities within the 28-nation bloc and their suspension would be an embarrassing blow to the two countries, both big users of EU money.
Such a step would require agreement with the European Parliament and that discussion would take place only after the summer break.