Cautious of Euroscepticism, EU Exempts Spain and Portugal from Budget Fines By Reuters

By Jan Strupczewski

BRUSSELS – The European Commission has proposed to cancel fines for Spain and Portugal due to their failure to keep budget deficits below the EU limit, effectively extending deadlines for compliance. This proposal is reportedly backed by Germany.

The Commission’s approach reflects a hesitance to enforce fiscal discipline amid rising anti-EU sentiment and sluggish economic growth. A similar leniency was shown toward France when it also breached deficit targets last year.

Valdis Dombrovskis, the Commission’s Vice-President, stated at a news conference, “Considering the past efforts of Spain and Portugal, the challenging current environment, and the arguments presented in their recent appeals, we agree to propose the cancellation of the fines.”

The decision to forgo penalties for Madrid and Lisbon was made by European Commissioners using a provision that allows for exceptional circumstances, following pleas from both nations to the EU executive.

According to EU regulations, governments are prohibited from running budget deficits exceeding 3 percent of GDP, designed to prevent excessive borrowing that could jeopardize the euro. When a country exceeds this threshold, the Commission and EU ministers typically set a deadline for reduction and may impose fines if the deadlines are not met.

Recently, EU finance ministers supported the view that neither Spain nor Portugal had taken sufficient steps to address their deficit issues, which would have resulted in fines amounting to 0.2 percent of GDP. Portugal was expected to reduce its deficit to below 3 percent last year but recorded a deficit of 4.4 percent instead. Spain was anticipated to achieve a similar reduction this year, but projections suggest it will not meet this target for 2016 or the following year.

Fines present a politically sensitive issue; Spain has been without a legitimate government since the inconclusive elections in December 2015, allowing the argument that rapid implementation of budget cuts is unfeasible. Furthermore, a growing wave of anti-EU sentiment across Europe could intensify if Brussels were to apply strict budget rules during this economic climate, where many economists advocate for increased spending to stimulate growth.

Conversely, maintaining the budget rules stipulated in the Stability and Growth Pact—established to safeguard the euro by curbing government overspending—is essential. The credibility of these rules has already been compromised by the previous decision not to penalize France for its ongoing violations of the Pact.

The Commission faced internal debate over this decision, with divisions between those favoring the cancellation of fines and those insisting that at least a nominal fine should be enforced to preserve the rules’ integrity. German Finance Minister Wolfgang Schaeuble, traditionally a proponent of fiscal discipline, reportedly swayed the decision towards no fines by reaching out to Commissioners from the centre-right political group to support Spain’s interim Prime Minister Mariano Rajoy.

Rajoy expressed his satisfaction with the Commission’s decision, stating that fiscal consolidation, growth, and employment remain top priorities for Spain. Portugal was also spared from fines because it would have been politically challenging to penalize one country while excusing the other.

Schaeuble mentioned that suspending EU structural funds—another potential measure under the reinforced Pact—could serve as a more effective means of influencing governmental budget policies compared to imposing fines. Economic Commissioner Pierre Moscovici echoed this sentiment, asserting that fines would not rectify past issues and could further alienate citizens who are skeptical about Europe.

Structural funds are allocated from the EU budget to support less wealthy member states in initiatives like infrastructure development and combating youth unemployment, which is particularly relevant for Spain. The Commission will initiate discussions regarding a partial freeze of the structural funds designated for Spain and Portugal in 2017, contingent upon consultations with the European Parliament when it reconvenes after the summer break.

It remains uncertain how much funding might be suspended; however, access to these funds could be restored quickly should the two nations formulate 2017 budgets reflecting their commitment to the EU’s financial regulations.