The EU threatened Spain and Portugal Tuesday (12 July) with huge fines for failing to fix years of high deficits, in the first time Brussels has wielded its disciplinary powers over member states’ budgets.
Madrid and Lisbon said the accusations were unfair but vowed to do whatever was necessary to win leniency from penalties that could be up to 0.2% of their economic output.
Eurozone finance 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”, it added.
Spain and Portugal now have 10 days to lobby the EU to impose no penalty and both countries said they intended to do so.
“It would be a huge paradox if the European economy … which is growing the most and creating the most jobs … were to be fined,” said Spain’s acting Economy Minister Luis de Guindos.
Portuguese Prime Minister Antonio Costa said any fine would be “unjustified and counterproductive” and slammed the whole process as “a contradiction”.
“The European economy and the eurozone will derive no benefit from applying sanctions, of any kind, on Portugal and Spain,” said Costa.
‘Rules are rules’
The European Commission will consider their arguments and must decide on sanctions within 20 days.
Expectations are high that the countries will in fact get away without a fine, but they will likely see EU aid suspended until fresh reforms are delivered.
The powerful German Finance Minister Wolfgang Schäuble urged the Commission to “propose the complete or partial suspension of structural aid for projects in 2017” in the two countries.
Under EU rules, the commission could also impose fines of up to 0.2% of gross domestic product – but to date it has not dared to use its full power against eurozone overspending.
Spain faces a fine of up to nearly €2.2 billion, while Portugal is on the hook for €360 million euros, based on GDP data for 2015.
The ministers launched the unprecedented process despite fears that too much austerity by Brussels will further fuel anti-EU populism after the Brexit vote.
“The rules are the rules,” said French Finance Minister Michel Sapin. However, he said these should only be applied “intelligently” as he urged the EU to heed the specific situation of each country.
“What’s most important for the more hawkish member states like Germany and the Netherlands is the political message of going through the entire process,” said Vincenzo Scarpetta, political analyst at the Open Europe think tank in London.
“This is all about the political stigma, a symbolic gesture that won’t have any immediate or objective impact on Spain or Portugal,” he added.
Triggering the sanctions process has been the long desire of Germany, which was instrumental in giving Brussels the new powers to crackdown on overspenders in the eurozone.
But the issue is especially sensitive for France, which is widely expected to miss its promise to bring its deficit back under under the 3.0% next year.
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.
Bailed-out Portugal, long considered a star reformer, sharply cut its budget deficit from close to 10 percent of GDP in 2010 to 4.4% last year, but that still overshoots targets. Spain, while avoiding a eurozone bailout, suffered through six years of recession.
In 2015 it reported a deficit of 5.1% of gross domestic product (GDP), still way off the target of 4.2% set by the commission and the official limit.
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.
In April, the executive and the ECB concluded that the needed progress on fiscal consolidation in Spain "has come to a halt, with part of the structural adjustment implemented in earlier years being reversed".
Following the elections on 4 October, a three-party coalition led by the Socialist party came to power in Portugal. The new government failed to submit its draft budget for 2016 by 15 October, as the EU’s fiscal rules said, and sent the draft proposal only on 22 January 2016.
After assessing the first draft, the Commission concluded that the budget was “in clear breach of the Stability and Growth Pact”, and requested more measures.
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. According to Portugal's national budget and the Commission's winter forecast, the general government deficit is expected to have been 4.2% in 2015.