EU Leniency for Spain and Portugal Signals Softer Economic Outlook, According to Reuters

By Jan Strupczewski and Gernot Heller

BRUSSELS – The European Commission’s recent choice to exempt Spain and Portugal from fines for exceeding budget deficits indicates a cautious shift toward more lenient economic policies in light of the fallout from the UK’s vote to leave the European Union.

Economics Commissioner Pierre Moscovici supported this leniency by highlighting the rising public skepticism toward Europe as evidenced by the Brexit referendum. He emphasized the need to avoid exacerbating euroscepticism, especially as the eurozone continues to recover from a prolonged sovereign debt crisis that remains fragile and could be further disrupted by uncertainties stemming from Brexit.

A senior official from one eurozone government acknowledged the exceptional circumstances, stating that nations that have implemented stringent measures during the crisis should be able to present arguments, particularly regarding social impacts, for avoiding fines. This official noted that imposing penalties could harm both economies and populations, and stressed the need for Europe to demonstrate understanding of the situation.

Critics from northern Europe expressed dissatisfaction with the decision to spare the two southern countries from financial penalties for repeatedly breaching the Stability Pact rules. However, the potential for Madrid and Lisbon to face a suspension of certain EU budget payments still looms.

Outrage over the Commission’s decision was somewhat tempered after reports emerged that Germany’s finance minister, Wolfgang Schaeuble, had personally intervened against sanctions. Daniel Gros, director of the Centre for European Policy Studies in Brussels, remarked that the Stability Pact seems to have been disregarded once again, recalling similar breaches in the past involving France and Germany.

German commentator Werner Mussler pointed out that the rationale provided for the decision undermines the credibility of the rules, suggesting that constant deviations from the regulations by the Commission may be fueling euroscepticism.

Jeroen Dijsselboem, the chairman of eurozone finance ministers, expressed disappointment over the Commission’s failure to recommend fines, stating that Spain and Portugal have not effectively acted to consolidate their budgets. He asserted that the risks remain significant for both countries.

A senior eurozone official remarked that a Dutch or Belgian finance minister advocating for budgetary savings in line with the Stability Pact would likely encounter ridicule in parliament. The volume of criticism surrounding the Commission’s decision compelled German Chancellor Angela Merkel to assert that the deficit limits still hold despite the ruling.

Merkel noted, "I don’t think the decision means that the Stability Pact is no longer valid," but did not address Schaeuble’s involvement or the reasoning behind it. A spokesperson for the German Finance Ministry found the Commission’s stance "comprehensible," pointing out that withholding promised EU structural funds could encourage Spain and Portugal to rectify their budget issues.

Schaeuble’s motivations remain unclear, whether stemming from loyalty to the conservative governing party in Spain, concerns over post-Brexit economic policy, or the desire to avert a eurosceptic backlash. Nonetheless, he appears unwilling to alter Germany’s own balanced-budget approach to increase public investment, despite pressure from Brussels regarding Germany’s substantial current account surplus.

Economists argue that this surplus has distorted the eurozone’s economic landscape, placing a disproportionate adjustment burden on southern nations struggling with high youth unemployment and legacies of public debt from the crisis. However, EU officials anticipate little change in Germany’s fiscal policy ahead of next year’s general election.

Moscovici and Commission President Jean-Claude Juncker aim to foster economic growth and a more balanced policy framework, while attempting to maintain the integrity of deficit limits.

Sylvie Goulard, a senior figure in the European Parliament’s economic committee, criticized the lack of symbolic fines for Spain and Portugal, warning that the decision might exacerbate euroscepticism in countries adhering to fiscal rules.