On 12 July, the European Council announced that Spain and Portugal had failed to take sufficient action to reduce their deficits in line with its guidelines to 3% of GDP. Both countries’ fiscal efforts had, according to the ruling, fallen “significantly short of what was recommended”.

This could have triggered sanctions under the excessive deficit procedure, as outlined in article 126(8) of the Treaty of the Functioning of the European Union. Accordingly, the commission was legally obliged to make a proposal regarding fines within 20 days, the default amount of which is 0.2% of GDP.   

Today, however, the commission called for no fines to be applied, and new economic goals set for the two nations. The council is not bound by the recommendation and will need to either approve, reject or amend it.

Explaining the recommendation, the commission said it had taken into account the “challenging economic environment”, and the submission of “reasoned requests” by Spain and Portugal to cancel the fines.

In view of this, the commission has suggested new targets for both countries to end their excessive deficits: Portugal by the end of this year; Spain by 2018.

“This is in line with commitments both member states have already announced and reflects the commission’s prudent approach in the current environment,” a commission statement said.

Fiscal rules across the bloc were tightened significantly in the wake of the financial crisis of 2007-08, and member states are now penalised if they do not take determined steps to stay within proscribed limits.

Also, under the rules, the EU can withhold a certain quantity of structural investment funds to Spain and Portugal for 2017. However, the commission decided to postpone a decision on this matter following a dialogue with the European Parliament.

The council has already extended the deadline several times for Portugal and Spain to bring their deficits within acceptable levels, but both nations have been dogged by economic problems.

Spain entered excessive debt procedures in 2009 and also took out significant loans from euro area member states to recapitalise its financial services industry. While the government deficit has been reduced (it is forecast to fall to 3.1% of GDP in 2017), the improvement was not significant enough to avoid the council’s ruling.  

The council now has 10 days to respond to the recommendations from the commission regarding fines for the two nations.