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08/12/2016

Spanish elections delay potential budget deficit fines

Euro & Finance

Spanish elections delay potential budget deficit fines

Commissioners Marianne Thyssen, Valdis Dombrovskis and Pierre Moscovici on Wednesday (18 May) during the presentation of the country specific recommendations.

[Ebs]

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

The Commission has pushed back triggering the sanction procedures until early July.

“We have concluded that this is not the right moment economically or politically to take this step,” European Economic Affairs Commissioner Pierre Moscovici told reporters on Wednesday (18 May) after the college meeting.

There is a “broad acknowledgement” between the Commissioners on the lack of effective action taken by Madrid and Lisbon to meet their deficit targets, EU officials told EurActiv.

The Commission had prepared recommendations for stepping up infringement procedures against both countries, which ultimately would lead to imposing fines costing up to 2% of their GDP, the sources added on the eve of the college meeting.

Commission to punish Spain and Portugal, ‘pardon’ Italy, on deficits

Spain and Portugal will get only one extra year to fulfil EU fiscal rules on their defecits, once sanctions against both countries are adopted, while Italy will escape an infringement procedure, EurActiv.com has learned.

EurActiv.com

These penalties against EU member state for breaching the EU fiscal rules would have been an unprecedented step by the Commission.

But European Commission President Jean Claude Juncker was wary of the “political consequences” that such a decision could have caused days before the Spaniards go to the ballot box and the in-or-out referendum in the United Kingdom to be held on 23 June.

“These are not easy decisions to take,” admitted Moscovici. “Whatever you do, you could be criticised from the other point of view,” he added.

The French Commissioner explained that the Commission took into account the global economic slowdown. In light of this, the executive wants to support a budgetary policy that could support growth, he said.

He also pointed out to the lack of a government in Spain capable of taking “the necessary measures”. The acting executive, in place because no new coalition has been formed since December’s elections,  has limited powers.

Moscovici recalled that Spain and Portugal have gone through a “tough crisis” and both “have made significant efforts when it comes to reforms”.

But he stressed that the institution will enforce the rules when the time comes.

“I want to reassure you. We are resolved to have the rules respected in the Commission,” he said.

Legally possible

A Commission official argued that the postponement of the recommendation is legally sound, as there is no deadline included in the EU rules as for when to take such a decision, according to the executive’s legal service.

The decision did not surprise some officials involved in the dossier, as all options were possible before the college of Commissioners meeting started on Wednesday morning.

A source inside the room insisted that the decision was “consensual” and every commissioner agreed on applying the rules “intelligently”.

The delay represents a small victory for Spanish Prime Minister, Mariano Rajoy, who lobbied Juncker over the last days to postpone stepping up the infringement procedure by stressing the efforts made over his mandate to balance the public accounts.

But, despite the postponement on launching the sanction procedure, officials agree that the “numbers are very clear”, indicating that the recommendation to sanction Spain and Portugal would ultimately come.

New calendars

For the time being, the college of Commissioners agreed on a new calendar for the Iberian economies to cut the deficit below the mandatory 3% of GDP.

Accordingly, both countries will get an additional year to fulfil the fiscal rules.

Spain should have met the deficit target by 2016. Instead, the Commission expects the deficit to reach 3.9% of GDP this year and 3.1% in2017.

Spain is now required to improve its structural effort by 0.25% of GDP this year and 0.5% of GDP in 2017 to fulfil the EU rules. This would represent an additional adjustment of about €8 billion.

Portugal failed to reduce the deficit below the 3% threshold in 2015 as agreed with the EU. The Commission granted one more year to the Portuguese government to reduce the deficit by adding measures worth 0.25% of GDP.

The extra efforts requested and the looming sanctions run against Rajoy’s offensive to convince Spanish voters to support him in the ballot box.

The Spanish leader, criticised due to his lukewarm reaction to the numerous corruption scandals affecting his party, told the Financial Times on 17 May that he was eyeing more tax cuts if he was re-elected.

Euro Commission Vice-President Valdis Dombrovskis, said that it is up to the Spanish authorities what adjustments to make as long as Spain meets the new deficit targets.

Meanwhile, the college of Commissioners decided not to launch an excessive deficit procedure against Italy, despite its deviation from the agreed fiscal path to reduce the mastodontic public debt of 132% of GDP. An excessive deficit procedure is a punishment for breaking EU fiscal rules.

The Commission granted Rome more leeway to accommodate the extra spending caused by the refugee crisis.

The institution also took into account the written commitments made by the Italian government to reach a deficit of 1.8% of GDP in 2017. The executive warned that it will remain vigilant and will check in autumn Italy’s progress once its draft budget for 2017 is submitted to Brussels.

The Commission also recommended closing the excessive deficit procedure on Ireland, Cyprus and Slovenia.

Positions

BusinessEurope, the EU employers confederation, urged EU member states to better implement the Commission's country-specific recommendations.

“In recent years our members have indicated that whilst the Commission has generally made the right reform recommendations, but the problem has been a lack of implementation by EU Member States," said  BusinessEurope Director General Markus J. Beyrer. "Whilst we need to look at today’s country-specific recommendations in more detail, we urge governments to take the Commission’s advice seriously and use it to increase reform impetus. In particular, where the Commission has granted Member States more time to reach fiscal targets, we urge them to use this wisely, looking in particular at the scope to increase the efficiency of public expenditure and reduce tax burdens.”

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. 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.

Timeline

  • 26 June: General elections in Spain.
  • Early July: Commission is expected to launch sanction procedures against Spain and Portugal for not taking "effective action" to fulfill the fiscal rules.
  • 12 July: Ecofin Council. Ministers should endorse Commission's recommendations for stepping up the infringement procedures.

 

Further Reading