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08/12/2016

Commission split on credibility of rules as Spain and Portugal get ‘pardon’

Euro & Finance

Commission split on credibility of rules as Spain and Portugal get ‘pardon’

"Ne soyons pas plus catholiques que le pape", demande jean-Claude Juncker à ses commissaires.

[EBS]

A strong group of commissioners was in favour on Wednesday (27 July) of imposing at least a symbolic fine on Spain and Portugal for breaching the Stability and Growth Pact, but Jean-Claude Juncker opted for a zero penalty – supported by German Finance Minister Wolfgang Schauble.

The college meeting saw commissioners discuss for the first time in EU history whether to fine member states for breaching the fiscal rules.

But the debate was not about Spain and Portugal’s “lack of effective action” to meet their deficit targets, but rather the credibility of the EU’s economic and fiscal rules. The outcome did not leave everyone happy, various sources told EurActiv.com.

Key economic commissioners, like the Vice-President for the euro, Valdis Dombrovskis, and Vice-President for Jobs, Growth and Investment, Jyrki Katainen, backed a symbolic fine.

In their view, this was a balanced approach to show the Commission enforces the existing legislation without causing too much pain to citizens. Despite the Stability and Growth Pact allowing for a penalty of up to 0.2% of GDP, Dombrovskis limited the amount to between 0.01%-0.04% of GDP, while Katainen suggested a fine of 0.01% of GDP. For Spain, this would have represented €100 million instead of more than €2.1 billion.

EU declares Spain, Portugal in violation of deficit rules

The European Commission on Thursday (7 July) officially declared Spain and Portugal in violation of the EU rules on government overspending, the first step towards unprecedented penalties against members of the 28-country bloc.

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But other members, including the Commissioner for Economic Affairs, Pierre Moscovici, highlighted various political and economic arguments to oppose any fine at all, including the efforts made by Spain and Portugal in the past, new commitments made by the Iberian economies, and the turbulent political situation agitated by the Brexit, the growing  of populist parties in Europe, and terrorism.

For Spanish and Portuguese citizens, “it would be hard to understand” a fine, given the consequences of the crisis and the “hardship” some segments still face, Moscovici told reporters on Wednesday.

Pope would want zero fine

Although most commissioners spoke, not all of them clearly expressed their position. In light of this, President Jean-Claude Juncker had “a lot room for manouevre”, a senior EU official commented.

Juncker warned of the political consequences of the fines when the sanction procedure was initially  discussed in May. This time around, his position was also clear.

“We must not be more Catholic than the Pope, but please make public that the Pope would want zero sanctions”, the President told his commissioners.

Finally, the Commission decided to recommend that EU Finance Ministers cancel the fine against Spain and Portugal.

Italy and Spain test EU’s 'intelligent' use of economic rules

The European Commission is expected to fine Spain on Wednesday (26 July), but it will give two extra years to Madrid to adjust its budget – while the commissioners pledge a solution for Italian banks that will protect small investors.

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The supporters of the zero fine camp received unexpected support just hours before the meeting. On the eve of the college meeting, Schäuble, phoned some of the commissioners who were advocating a tough stance with Madrid and Lisbon, including the German Commissioner, Günter Oettinger, EU sources told this website.

Against this backdrop, Juncker had enough backup to go ahead against the opinion of his two economic vice-presidents.

His final decision was welcomed by some members of the college. “I am very happy,” Portuguese Commissioner, Carlos Moedas, told EurActiv after the meeting. His Spanish colleague, Miguel Arias Cañete was “proud” of being a member of this Commission, as he also defended the cancellation during the discussion.

Without police

But for others, the Commission took a dangerous step. Various sources among those who supported a symbolic fine argued that, after this decision, the Commission would not be capable of imposing any fine for breaching the Stability and Growth Pact in the future.

“The issue at stake is enforcing the existing legislation, while those who want simply to break the rules talk about applying them with intelligence,” a senior EU official explained. “I prefer to live in a system where I trust the police,” he added.

In line with some analysts, commissioners in favour of a strict application of the rules argued that the Commission’s reasoning to circumvent the fiscal discipline would further fuel mistrust toward Brussels in countries like Austria, Finland or Germany.

Meanwhile, the decision to grant two extra years in line with the forecast of Spain’s independent fiscal authority was also questioned, despite the €15 billion adjustment  expected from Madrid by 2018.

“This is a very soft path for Spain”, a senior EU official commented.

However, Spanish parties have failed so far to form a government after two inconclusive elections and recent talks launched by the King Felipe VI.

Against this backdrop, a €5 billion structural adjustment (more cuts or new taxes) that the Commission expects from Spain in its draft budget for next year appears to be difficult.

This draft budget will be crucial to assess the efforts made by Spain and Portugal, as the executive will evaluate by 15 October, the date to submit the draft budgets for 2017, what Lisbon and Madrid have done to correct the fiscal deviation.

Depending on the result of this evaluation, the Commission, in liaison with the European Parliament, will take a decision on freezing part of the EU structural funds for next year.

What we are proposing is “a realistic adjustment”, Dombrovskis told reporters on Wednesday.

MEPs step in to ease sanctions over deficit rules

The European Parliament’s intervention “would benefit” Spain and Portugal, as they face the freezing of millions in EU funds for having breached fiscal rules, sources told EurActiv.com.

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Background

Following the Council's unanimous decision on 12 July that neither Spain nor Portugal had taken effective action to correct their excessive deficits, the Commission was legally obliged to present within 20 days a proposal for a fine. The default amount established by the legislation is 0.2% of GDP, but this can be reduced on the grounds of exceptional economic circumstances or following a reasoned request by the Member State concerned. Both countries submitted such reasoned requests.

Taking account of the economic and fiscal situation, the Commission recommends that Portugal puts an end to its excessive deficit by 2016 and that Spain does so by 2018, at the latest. This is in line with commitments both Member States have already announced and reflects the Commission's prudent approach in the current environment.

For both countries, the deadline for taking effective action and reporting on it will be 15 October 2016.

In 2013, Spain received three extra years to cut its deficit below the mandatory 3% of GDP of the pact.

Despite the fact that this was the third time Madrid had been granted leeway since 2009, the deficit reached 5.1% of GDP in 2015, higher than previously announced.

The European Commission's latest forecast predicts that the Spanish deficit will be 3.9% of GDP this year and 3.1% in 2017.

Portugal has been in the corrective arm of the Stability and Growth Pact since December 2009 and was asked to bring the deficit to below 3% of GDP by 2015. For 2016, the Council recommended that Portugal should make a structural effort of 0.6% of GDP.

Further Reading

European Commission

  • Opinions on "no effective action" taken by Spain and Portugal to meet their Stability and Growth Pact targets.
  • Country-specific recommendations on Spain and Portugal.
  • Spring economic forecast.

European Council