Spain and Portugal braced for EU deficit verdict on 12 July

Spanish Prime Minister Mariano Rajoy believes that conservative nominee Francois Fillon will win the French election. [Consilium]

The Slovak presidency of the EU expects the European Commission to recommend sanctions against Spain and Portugal for breaching EU budget deficit rules this week, in time for a decision at the upcoming Ecofin meeting of finance ministers on 12 July.

The European Commission is expected to trigger a sanctions procedure against the Spanish and Portuguese governments on Tuesday (5 July) for failing to meet their deficit targets.

The executive already postponed its decision on 18 May, arguing it could influence the outcome of the Spanish election, held the following month.

Now that the elections are done, the Commission is expected to take its recommendation out of the freezer.

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.

But the Juncker Commission is keeping its cards close to its chest, suggesting a last-minute change of heart is still possible.

Various EU sources were unable to confirm, late on the eve of the decision, whether the Commission would finally push sanctions against Spain and Portugal. If adopted, this would be the first time the Commission recommends sanctions against an EU member state for breaching the Stability and Growth Pact, which limits budget deficits to 3% of GDP.

Faced with a possible new delay, the Slovak presidency of the EU urged the executive to take a decision, so that EU finance ministers can discuss it at the next Ecofin Council on 12 July

The Slovak presidency expects the European Commission to announce its recommendation “in time to allow for a proper assessment and preparation of this item for the upcoming Ecofin Council,” a spokesperson of the rotating EU presidency told

EU sources said the most likely option was a college decision on Tuesday (5 July), allowing enough time for the executive’s recommendation to be discussed by the deputies of EU finance ministers (the Economic and Financial Committee) and the 28 member states’ ambassadors (COREPER).

But another option was gaining momentum on Monday evening (4 July) – an adoption by written procedure on Thursday (7 July). In that case, finance ministers would have little time to prepare their decision for the following Tuesday (12 July) and may be tempted to delay it until the next Ecofin meeting, on 11 October.

This would give additional time to Spain’s acting prime minister, Mariano Rajoy, to conclude negotiations to forge a new coalition government after the elections held on 26 June.

Brexit fuels Rajoy’s victory as Podemos tanks

Podemos called for referendums and sent mixed messages, but failed to meet voters’ expectations ahead of the Spanish elections, while the centre-right Partido Popular (PP) won 14 seats more than in the December elections.

European sources pointed out that even if the College of Commissioners finally adopts a negative recommendation for the Iberian economies by written procedure on Thursday, “it would be still possible” to conclude the preparatory work in time for the 12 July Ecofin.

The issue has already been included on the agenda of the Ecofin, and the COREPER is expected to meet on 7 July.

‘Brexit’ effect? 

But Britain’s shock referendum to leave the European Union may further complicate the Commission’s political assessment.

Days before the executive’s recommendation was expected, officials pointed out  that the Brexit vote would not affect the negative opinion on the Spanish and Portuguese economies. Others meanwhile were more cautious, reminding that “everything is possible under this Commission”.

Spain, Portugal sanctions on the table despite Brexit, EU warns

The European Commission will make a final decision next Tuesday (5 July) on whether to launch sanction procedures against Spain and Portugal for breaching EU fiscal rules, officials told

Commission President Jean-Claude Juncker already postponed his verdict in mid May, fearing a political backlash such a decision might trigger on the eve of the Spanish elections and Britain’s in-or-out referendum on the EU.

At the very last minute, Juncker decided to postpone the decision to “early July”, overruling his two Commissioners in charge of economic matters.

Burt now, the political and financial turbulences triggered by the victory of the “leave” camp in the British referendum further complicated a decision on whether to punish countries for breaching EU fiscal rules.

A possible compromise 

According to AFP, the European Commission could further postpone a decision to its College meeting on 27 July, thereby passing the hot potato to finance ministers, who meet on 12 July at the Ecofin Council.

This option would be a compromise between Germany and the Netherlands, who champion a strict application of the rules, and countries like France and Italy, which are sceptical about using the sanctions procedure for the first time at this moment.

Under this scenario, the 28 finance ministers would give Madrid and Lisbon ten days to put forward new measures to correct their deficits.

But this option would also be controversial as it would infringe the rulebook of the Stability and Growth Pact.

Dijsselbloem berates Juncker for failing to apply EU pacts

Eurogroup President Jeroen Dijsselbloem has criticised European Commission President Jean-Claude Juncker for saying that the European Commission has given France leeway on fiscal rules “because it is France”.

As EU officials explained, the sanctions are the result of a lack of effective action taken by Portugal and Spain to correct their deficits and take them below the mandatory 3% of GDP on time.

If the Council backs the executive’s negative opinion, both countries could be fined with up to 0.2% of GDP and could see part of their EU funds frozen. Once the Council backs the executive’s verdict, the Commission will have 20 days to detail the size of the fine.

Last May, the executive gave one extra year to both countries to meet EU fiscal rules, despite the fact that the sanctions procedure was still open.

The Council’s legal service questioned the executive’s recommendation to grant additional leeway to Spain and Portugal while the issue of the past fiscal slippages remained unresolved.

Meanwhile, inside the Juncker Commission, the issue is far from being settled.

German EU Commissioner Günther Oettinger said in a interview with Bild on Monday that Spain and Portugal should be fined for missing their budgetary targets.

But for some other officials, “the general objective of the European Commission is not to punish but to encourage countries to find a solution to respect their commitments,” one source told AFP on condition of anonymity.

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.

  • 5 July: Commission expected to recommend sanctions against Spain and Portugal for breaching the Stability and Growth pact (oral procedure)
  • 7 July: Alternative date for Commission decision on Spain and Portugal (written procedure).
  • 12 July: Ecofin Council
  • 11 October: Ecofin Council

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