European finance ministers will now have to decide whether to uphold the commission’s decision. If they do, the commission has 20 days to propose sanctions which include fines of up to 0.2% of GDP and a temporary suspension of some EU funding.

Valdis Dombrovskis, vice president of the commission responsible for euro and social dialogue, said: “Lately, the two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets.

“Reducing the high deficit and debt levels is a pre-condition for sustainable economic growth in both countries.”

The unprecedented step taken by the commission to enforce EU budget rules is designed to safeguard sound public finances and growth in the eurozone and avert another crisis in the bloc’s economy.

Following the UK’s vote to leave the EU, the commission has had to weigh up calls to demonstrate the union can deliver economic success amid weak growth or to garner support for the project and unity among the EU’s 28 member states.

In May, the commission delayed its decision on the two nation’s deficit situations until after the UK’s EU referendum and the Spanish general elections.

A month earlier, the European Court of Auditors had criticised the commission for being too lax in enforcing EU deficit rules.

Portugal missed the deadline to correct its deficit in 2015 and the commission disputed whether its budget for this year was in line with its budgetary obligations.

Spain has missed its deficit reduction target every year, and is on track to miss its 2016 deadline for correction. Its deadline had already been extended three times.

The commission has now concluded neither state did enough to meet their deficit-reduction targets. Jeroen Dijsselbloem, the Dutch finance minister and president of the Eurogroup made up of his counterparts, said earlier this week that all the flexibility allowed for in the EU’s rules had been “used up”.

“When I look at the numbers I really have to conclude that Spain and Portugal did too little,” he said.

He and the rest of the Eurogroup will now discuss whether to endorse the commission’s decision that Portugal and Spain did not take effective action and allow it to take the sanctions procedure further in a meeting scheduled for July 12.

The commission is legally required to present a proposal for fines and suspension of some EU funds if the Eurogroup endorses its decision, however it could recommend that the council reduce the fine or cancel it altogether.

Spain’s economy minister Luis de Guindos has stressed his country should not be fined as it attempts to put its economy back on track after the financial crisis. He highlighted that the country has worked hard towards recovery. 

Portuguese prime minister António Costa has also said his country does not deserve sanctions and suggested Portugal is being punished for its anti-austerity government.

While austerity hawks support the sanctions, others are uncertain whether the controversial fines would be a good idea at a time when anti-EU sentiment is on the rise across the continent.

Other countries, including France and Italy, have also in the past been warned about missing deficit and debt targets but have never been sanctioned.

Portugal finished 2015 with a deficit of 4.4% of GDP, meaning it had failed to bring its deficit down to the EU’s agreed ‘safe’ threshold of 3%. It had been subject to the EU’s corrective mechanism since 2009.

Spain’s deficit reached 5.1% of its GDP last year, also well above its 2015 deficit target of 4.2%.