‘Stability and Growth Pact’: EU Commission seeks sanctions on Spain, Portugal on deficits

Bloomberg: The European Commission began formal disciplinary procedures against Spain and Portugal on Thursday for their excessive deficits in 2014 and 2015, which may lead to fines for the two countries before the end of July.

Both had deficits greater than the European Union’s limit of 3 percent of gross domestic product in the past two years and failed to correct the deficits quickly enough, the Commission said.

The two countries now risk fines and the suspension of EU funds if they cannot show the rules were breached because of “exceptional economic circumstances”. Fines up to 0.2 percent of GDP may be imposed if the excessive deficits aren’t reduced, although sanctions so far have never been applied.

European finance ministers must now decide whether to back the proposal by the European Commission. Should the recommendation be approved, the commission would have 20 days to propose fines that could reach as high as 0.2 percent of gross domestic product, and a suspension of some regional funds. The penalties could be reduced or canceled for “exceptional” circumstances.

“The two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets,” Valdis Dombrovskis, a commission vice-president, told reporters in Brussels. “Reducing the high deficit and debt levels is a pre-condition for sustainable economic growth in both countries.”

The EU is weighing the need to enforce budget rules against a backdrop of wider calls to rally support for the bloc following the U.K.’s decision last month to leave. Spain’s Acting Economy Minister Luis de Guindos has been adamant that sanctions would be unreasonable as the government is working to fix its economy after the financial crisis — an argument countered by proponents of austerity.

“These rules contain some flexibility, but in this case the flexibility has been used up,” Jeroen Dijsselbloem, the Dutch finance minister who leads the group of his euro-area counterparts, said in The Hague earlier Thursday. “When I look at the numbers I really have to conclude that Spain and Portugal did too little.”

Punishing the Iberian countries could be a contentious issue. That’s because while other countries including France and Italy have all received warnings in recent years after missing targets on deficit or debt, no country has so far been sanctioned. Populist parties have been making gains across Europe, a wave that’s been driven in part by a rejection of the EU’s supranational powers.

EU finance ministers have a meeting scheduled for July 12, when they may discuss whether to enable the commission to go ahead with the penalty procedure.

Since the rules were beefed up in 2011 and 2013 in response to the debt crisis, the commission has more powers to push for sanctions against member states including fining countries that persistently breach their commitments.