Portuguese budget gets green light – after last-minute adjustments

Commissioner Moscovici stressed that the Commission acts within the Stability and Growth Pact, but defended an "intelligent" use of the fiscal rules. [EUROPEAN COMMISSION]

The EU Commission accepted on Friday (5 February) the draft proposal from Portugal for the country’s 2016 budget – but only after Lisbon included last-minute adjustments and following an intense discussion in an extraordinary meeting the college of commissioners.

The decision came after intense efforts from EU officials both in Brussels and in Lisbon succeeded in convincing the Portuguese government to make just enough efforts not to reject the draft budgetary plan (DBP).

The round of talks led to additional measures worth up to €845 million, part of them agreed with Lisbon on the eve of the college meeting.

These additional adjustments, which represent a structural effort of 0.1% and 0.2% of GDP were just enough to avoid a rejection of the budgetary plan, as it brings the structural gap below 0.5% of GDP.

The coalition of left-wing parties led by the Socialist Antonio Costa should have included in its DBP a structural effort worth 0.6% of the GDP. However, the new government in Lisbon took power in November by promising to reverse the austerity-led policies and reforms imposed by the EU partners since the country requested a bailout programme in 2011.

Commissioner for Economic Affairs, Pierre Moscovici, said that the decision was “good” not only for Portugal but also for the eurozone, as the region “moves away from a dangerous situation” affecting one of its members.

But both Moscovici and the Vice-President for the Euro, Valdis Dombrovskis, told reporters after the college meeting that the country remains at risk of non-compliance, so the EU authorities would remain “vigilant”. “We need to remain very attentive” because “risks are still there”, Dombrovskis said.

Moscovici explained that the executive would examine Portugal’s public accounts again in May, once the consolidated data of 2015 is released by Eurostat in April and the Portuguese government submits its fiscal plan for the next years.

The Portuguese case represents the first – and smallest – challenge of the growing defiance emerging from the left-wing governments in the southern member states against the EU fiscal rules.

>>Read: PIGS threaten EU’s growth prospects, Commission warns

Italy and Spain, the third and fourth largest economies of the eurozone, respectively, could represent a bigger test this year for the Commission’s credibility as a guardian of the fiscal rules.

The Prime Minister of Italy, Matteo Renzi, is at odds with the Commission over the additional flexibility he requested to reduce Italy´s massive public debt. Meanwhile, the Socialist leader in Spain, Pedro Sanchez, is in talks with the left-wing party Podemos to form a Government. Both parties are against any further cuts this year as Brussels demands, and could face a Portugal-type verdict in Spring.

Against this backdrop, Moscovici concluded that the outcome of the discussion with the Portuguese authorities was “positive”, because “we worked together in a calm and constructive way”.

The decision could raise some eyebrows among the backers of stricter fiscal oversight, in particular in the German government and the ECB.

>>Read: Member states limit new flexibility clauses in EU fiscal pact

Moscovici admitted that the commissioners had a “real discussion” to decide whether to accept or reject the Portuguese. “A number of concerns were expressed”, Dombrovskis added.

But Moscovici argued that “dialogue does more than rejection”.

“The Commission is showing its credibility” in conjunction with the national governments, he concluded. 

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.

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