EU ends Spain-Portugal budget stand-off

Posted on July 27, 2016

Spain's acting Economy Minister Luis de Guindos reacts after his arrival at the Spanish parliament in Madrid, Spain April 19, 2016. REUTERS/Andrea Comas©Reuters

Luis de Guindos, Spain’s economy minister

Brussels has moved to end a stand-off with Spain and Portugal over their persistent failure to hit EU budget targets, proposing that neither country be fined for breaching fiscal guidelines.

In a step that defuses months of tension, the European Commission moved on Wednesday to cancel the penalties, despite earlier rulings that Lisbon and Madrid had failed to take effective action to reduce their budget deficits. It would have been the first time a fine was levied.

    The issue had dragged on since May, when the commission postponed decisions because of the Spanish election. Although fiscal hawks warned that the credibility of the eurozone’s post-crisis rule book was at stake, Spain and Portugal argued against any punishment because economic growth is set to slow in Europe as a result of uncertainty over Brexit.

    After the commission showed leniency to France recently, critics suggested the EU executive arm was making an example of weaker member states.

    Pierre Moscovici, EU economics commissioner, said the decision not to levy fines recognised the tough fiscal consolidation already carried out in each country. He also indicated the move was partly motivated by waning popular support for the EU institutions.

    “I think we took the wisest decision in economic terms. Even a symbolic fine would not have been understood by people . . . A punitive approach would not be the right one at a time when people doubt in Europe.”

    Under reinforced budget rules, the commission could have imposed a maximum financial punishment of 0.2 per cent of GDP, equal to €2bn for Spain and more than €300m for Portugal.

    I think we took the wisest decision in economic terms. Even a symbolic fine would not have been understood by people . . . A punitive approach would not be the right one at a time when people doubt in Europe

    – Pierre Moscovici

    According to people briefed on the discussions, the commission was split between a majority who preferred to simply set fines at zero and a minority who backed a symbolic low penalty.
    Wolfgang Schäuble, Germany’s hawkish finance minister, is said to have contacted the commission to urge leniency.

    Fiscal deadlines for both countries will now be extended. Spain must bring its 4.6 per cent deficit under 3 per cent by 2018, two years later than demanded previously. Portugal must achieve a 2.5 per cent deficit by the end of 2016, one year later than its previous goal.

    I was convinced there wouldn’t be a sanction. Why? For a very simple reason: to put a sanction on Spanish society would be a mistake. Spanish society has made a brutal effort

    – Luis de Guindos

    Madrid and Lisbon welcomed the decisions. Luis de Guindos, Spain’s finance minister, said: “I was convinced there wouldn’t be a sanction. Why? For a very simple reason: to put a sanction on Spanish society would be a mistake. Spanish society has made a brutal effort.”

    Augusto Santos Silva, Portugal’s foreign minister, said it showed Lisbon had been “in the right” in arguing that any sanctions would be unjust. António Costa, Portugal’s socialist prime minister, had said only on Tuesday that it was “not looking good” for Lisbon as some commissioners were thought to be calling for fines.

    Although the decision must be approved by member states, there is little political appetite for substantial penalties. Spain and Portugal could lose some EU regional aid funds but such restrictions could lapse if they curb their deficits.

    With additional reporting by Ian Mount in Madrid and Peter Wise in Lisbon

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