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.
“The Commission confirms that Spain and Portugal will not correct their excessive deficits by the recommended deadline,” the EU’s executive arm said in a statement.
If endorsed by the EU’s finance ministers, the Commission is then legally obliged to propose fines against the two neighbouring countries, which were both hit hard by the financial crisis.
“Lately, the two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets,” said Valdis Dombrovskis, the EU Commission’s vice-president in charge of the euro.
“We stand ready to work together with the Spanish and Portuguese authorities to define the best path ahead,” he said.
Many EU powers led by Germany have long hoped for the Commission to finally crack down on public overspenders, but with populist fires burning after the Brexit vote, ministers meeting in Brussels on Tuesday could decide to delay their immediate endorsement.
“There is uncertainty creeping in light of the UK vote result,” an EU diplomat told AFP.
France and Italy will be the most willing to delay the penalty process, fearing that their own years of EU rule breaking would put them next in line for a sanction by Brussels.
Ahead of the Commission announcement, Portuguese Prime Minister Antonio Costa warned that Brussels would foster a rise in Euroscepticism in Portugal if EU sanctions are applied.
In a letter to the European Commission, Costa cited “the results of the UK referendum and its impact on the European Union” as reasons why the Commission should refrain from full implementation of the rules.
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.
- 12 July: EU Finance Ministers' meeting