Brussels postpones deficit discipline for Spain and Portugal

19 May 16

The European Commission has deferred its decision on disciplinary action regarding Spain and Portugal’s stubborn “excessive” deficits until early July.

Any punishments for breaking the EU’s fiscal rules, which includes fines of up to 0.2% of gross domestic product, will now be postponed until after the general election in Spain on 26 June and the UK’s referendum on whether to remain in the EU, set for 23 June.

Deficits in both the Iberian countries are well above the 3% of GDP deemed acceptable by the bloc’s policy.

Portugal missed its deadline to correct this last December, while Spain was due to bring its deficit down to target this year.

However, Pierre Moscovici, EU commissioner for economic and financial affairs, said Spain’s target was “no longer realistic”.

“Therefore we are proposing new deadlines for countries to correct their excessive deficits,” he said.

“We propose that each country receives one extra year and one extra year only.”

The commission suggests that the new deadline for Portugal be 2016 and for Spain 2017. They are forecast to log fiscal deficits of 2.7% of GDP and 3.9% of GDP this year respectively.

While the shortfall in Portugal’s general government finances is below the 3% limit, the structural deficit is expected to increase for the next two years and the country is still burdened by high levels of public debt, which stands at around 130% of GDP. Both factors put the country in breach of EU rules.

Portugal has been in the dog house with the commission for most of this year. In February, the commission warned that the country’s overly optimistic 2016 budget was at risk of “serious non-compliance” with EU rules and told the country to bring it in line with budgetary obligations.

Spain and Portugal aren’t the only countries subject to the so-called excessive deficit procedure. The commission recommended that Cyprus, Ireland and Slovenia all be exempt from the corrective mechanism yesterday, having brought their deficits to below the target.

This would reduce the total number of member states subject to corrective action to six. As well as Spain and Portugal, Croatia, France, Greece and the UK are all currently in breach of EU deficit rules.

Remain campaigners in the UK will be pleased to learn the commission has delayed its decision, as the potentially controversial punishments won’t be implemented until after Britain votes on EU membership.

Italy’s debt levels are also in breach of EU policy, but the commission granted the country significant flexibility yesterday while it struggles to cope with the cost of the refugee crisis.

These country-specific measures came alongside the release of the commission’s spring 2016 European Semester package, which outlines recommendations on economic policy for member states.

As the EU looks to bolster its mediocre recovery, the commission suggested boosting investment, which is stuck below pre-crisis levels, implementing structural reforms and greater fiscal responsibility.

Commission vice president Valdis Dombrovskis said the package places “major emphasis” on reducing obstacles to growth, boosting employment, modernising labour, product and service markets, easing the business environment, reforming public administration and making tax systems fairer and more efficient.

Moscovici added: “Slower global growth and high uncertainty mean we must accelerate our efforts to strengthen the European economy through well-targeted reforms.

“Responsible fiscal policies should also support job creation and help the spread the fruits of recovery more widely. These are the guiding principles underpinning the commission’s policy guidance for member states.”

The commission’s approach now needs to be endorsed by the council. It is then up to member states to implement country-specific recommendations over the course of the year. 

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