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04/12/2016

Spain and Portugal pledge new measures to avoid EU deficit fines

Euro & Finance

Spain and Portugal pledge new measures to avoid EU deficit fines

Economic Affairs commissioner, Pierre Moscovici, said that he is "open for dialogue" with Madrid and Lisbon.

[EU Council Eurozone/Flickr]

Both Spain and Portugal have submitted their arguments to the European Commission in a bid to avoid penalties for breaching the fiscal rules, expected to be announced on 27 July.

Lisbon sent its reasoned request on Monday (18 July) to make its case for reducing or even cancelling such a penalty. Spain submitted its reasons the week before.

Both governments vowed that they will adopt further measures if needed in order to fulfill the Stability and Growth Pact’s deficit threshold of 3% of GDP.

Spanish elections delay potential budget deficit fines

The European Commission today (18 May) decided to delay potential fines against Madrid and Portugal for failing to meet their budget deficit targets, partly becuase of the upcoming Spanish elections on 26 June.

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They are expected to get an extra year to cut their deficits below the mandatory 3% of GDP once the fines are announced. Portugal should meet this target this year and Spain in 2017.

The fine could amount to 0.2% of GDP of these countries and the freeze of their structural funds for 2017.

In the case of Spain, the fine could be more than €2 billion and for Portugal it could be up €346 million.

However, the executive is expected to propose a symbolic fine given the efforts made by both governments in the past, the new commitments announced in their reasoned requests and the shaky political outlook in Europe.

According to the rules, the lack of effective action to meet the deficit targets should be the only criteria to fix the fine. But the commissioners have indicated over the last days that the rules are “intelligent”.

“We are open for dialogue. The idea is that we are able to take onboard the arguments that the ministers provide,” the EU Commissioner for Economic Affairs Pierre Moscovici said on 7 July when the sanction procedure was launched.

Eurogroup President, Jeroen Dijsselbloem stressed on 11 July that “the question is what will make these countries this year and next to solve their fiscal problems.”

The executive’s openness came after repeated calls from Madrid, Lisbon, Paris and Rome to avoid “absurd” steps when it comes to enforcing the fiscal rules, as Italian Prime Minister Matteo Renzi warned.

“Sanctioning the past doesn’t make political and economic sense for countries that are already taking effective action, as in the case of Portugal,” Finance Minister Mario Centeno wrote in the letter to the Commission.

“Every day I am more convinced that the sanction will be zero,” Spain’s acting Minister of Economy, Luis de Guindos, said last week. “The reason why I am optimistic is the injustice that would represent imposing a sanction on Spain” in light of the efforts made, Guindos added.

The executive launched the sanction procedure against both countries on 7 July. Once the Ecofin Council endorsed its negative opinion, the institution is expected to come up with a fine on 27 July.

Commission threatens Spain and Portugal with fines

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.

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More commitments

In order to avoid a multimillion euro penalty, the Spanish and Portuguese governments pledged additional adjustments to meet their deficit targets.

“The Portuguese government is ready to adopt fiscal measures to correct any eventual deviations on the budgetary execution,” the Portuguese letter submitted on Monday said.

Portugal’s Ministry of Finance said that it has “contingent measures” worth €542.8 million (or 0.3% of GDP) to be adopted in case of deviation from the fiscal path.

Meanwhile, the Spanish government pledged a €6 billion increase in corporate taxes, and additional €1 billion by bringing to July the end of this year’s budget.

However, these efforts could fall short of the Commission’s demands.

In the country-specific recommendations issued on 18 May, the Commission set up a fiscal path which would be the basis for the new recommendations under the Excessive Deficit Procedure, Moscovici said.

According to May’s recommendations, Spain should reach a deficit of 3.7% of GDP in 2016 and 2.5% of GDP in 2017. To reach these targets, the Commission expects a significant structural effort (measures excluding the impact of the economic cycle) worth 0.25% of GDP this year and 0.5% in 2017.

Spain’s deficit was 5.1% of GDP in 2015.

That would imply that Spain’s new government should adopt additional cuts or raise taxes amounting to €2.5 billion this year and €5 billion in 2017.

In its negative opinion on Spain, the commissioners complained that the country did not take advantage of the better-than-expected economic conditions to accelerate the deficit reduction.

Meanwhile, Portugal should cut its deficit to 2.3% of GDP this year, from 4.4%.

The structural effort requested to Portugal for this year (0.25% of GDP) would be in line with the additional efforts promised by its government.

But according to the Commission’s recommendations issued in May, Lisbon should also achieve a fiscal adjustment of at least 0.6% of GDP in 2017.

Background

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.

Timeline

  • 27 July: expected date for Commission's announcement on the fines.

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.

COUNCIL