Brussels willing to grant Spain more time to submit fiscal measures

Economic Affairs Commissioner, Pierre Moscovici, met with Spain's acting Economic Minister, Luis de Guindos, during the G20 summit. [EBS]

EU officials have responded with a conciliatory tone to Spain’s difficulties in meeting agreed fiscal targets as new elections loom in December to break the ongoing political stalemate.

Spain is again on the verge of breaching its EU partners’ demands. Just a few weeks after it became the first EU member state, together with Portugal, sanctioned by the EU for violating the Stability and Growth Pact, Madrid admitted it would not submit on time the new adjustment measures agreed with the 28 member states to narrow its budget deficit.

The European Commission gave its pardon to Spain and Portugal in July, as both nations escaped being fined with 0.2% of their GDP. In return, both countries promised to submit new measures to meet their deficit targets by 15 October, when member states submit their draft budgets for the following year.

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

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.

But following his failed attempt to win support in Parliament for another term, the conservative caretaker government of Mariano Rajoy had to admit defeat also on the budgetary front.

Senior politicians from the Popular Party (PP) told the EU executive it would be “very difficult, almost impossible” to submit a draft budget with the promised new taxes or budget cuts by mid-October.

This was the message conveyed by Luis de Guindos, Spain’s acting Economic Minister, to the Commissioner for Economic Affairs, Pierre Moscovici, last weekend during the G20 summit held in Hangzhou (China).

Despite this new setback, EU authorities were rather understanding with the political stalemate in the country and its impact on Spain’s budgetary commitments.

An EU official said nobody could blame Madrid for failing to send a draft budget if the Spanish parliament is incapable of nominating a new prime minister.

“If there is no government what can you do?,” another official wondered, stressing that the institutions have to be “pragmatic” in this situation.

However, Spaniards themselves are less understanding than EU authorities, as the likelihood of going to the ballot box for the third time in a year comes closer.

Guindos told reporters on the sidelines of the G20 that Madrid would just send an updated version of its 2016 budget, taking into account macroeconomic forecast for next year, including the country’s debt service.

But Spain will not include a structural effort worth 0.5% of GDP (around €5 billion) as requested by EU authorities for both 2017 and 2018.

The Commission expects the Spanish deficit to decrease from 5.1% of GDP in 2015 to 2.2% GDP in 2018.

Although sources in Brussels said “it is not a good situation”, officials were not concerned since Madrid still has an additional two-year deadline to cut its deficit below the 3% of GDP threshold.

Spain and Portugal pledge new measures to avoid EU deficit fines

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.

Spain is on track to meet another demand made by its European partners in July in exchange for the ‘pardon’.

The country will raise corporate tax and will eliminate part of the numerous loopholes that siphoned revenues away.

Despite being a caretaker government, Rajoy said that he would send a proposal to review corporation tax. He argued that a new draft law was possible in this case to meet the commitments made with Brussels, as it would not represent an additional burden for the next government.

The Eurozone Finance Ministers (the Eurogroup) are expected to discuss the state of the Spain and Portugal cases on 9 September during their informal meeting in Bratislava (Slovakia).

The Eurogroup will also discuss the implementation of the Greek programme and the outstanding milestones in order to complete the first review.

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 2015, 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.

  • 15 October: deadline for the member states to submit to the European Commission their draft budgets for the following year.
  • 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.

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