The European Union's executive postponed Wednesday a verdict on whether Spain and Portugal should be punished for breaking deficit rules, while Italy was let off the hook over its austerity-busting budget plans.

Members of the eurozone are supposed to keep their deficits below 3 per cent of gross domestic product (GDP), and aim for a balanced budget. Portugal was meant to hit the 3-per-cent target last year, while Spain had until the end of 2016.

"This is not the right moment economically or politically" to confront Madrid and Lisbon, EU Economy Commissioner Pierre Moscovici said, postponing the decision until early July, once elections have taken place in Spain.

Voters are to return to the polls for the second time in six months on June 26, after inconclusive results in December. Moscovici said Madrid's interim government would not be "capable at present of taking the necessary measures" to meet EU budget targets.

While Central Bank data in Madrid showed that Spain's public debt was on track to surpass the 100-per-cent-of-GDP mark for the first time since 1909, the European Commission also proposed granting Madrid and Lisbon an extra year to bring their deficits below 3 per cent of GDP.

Spain is the eurozone's fourth-largest economy, enjoying strong growth after a banking crisis that required a 41-billion-euro (46-billion-dollar) public bailout that saddled the government with debt. The country's deficit came in at 5.1 per cent of GDP last year.

The economy in neighbouring Portugal returned to growth in 2014, three years after the country received a 78-billion-euro international bailout. Its 2015 deficit exceeded commission expectations, coming in at 4.4 per cent of GDP.

Madrid and Lisbon must continue to clean up their finances "at a strong pace," Moscovici warned. The proposed relaxation of the deficit targets for the two countries now requires the approval of eurozone and EU finance ministers.

EU rules foresee fines for deficit offenders in the eurozone currency bloc, although the commission has never resorted to that option. The fine for Spain could reach a maximum of 2 billion euros, while Portugal could be hit with a 360-million-euro fee.

ING bank analyst Carsten Brzeski welcomed Wednesday's decisions, noting that EU budget rules, tightened in the wake of the eurozone debt crisis that led to bailouts for Greece, Ireland, Portugal, Spain and Cyprus, have been "too strict and rigid" at times.

"It is not always a bad thing if barking dogs don't bite," he wrote in a client note, adding that the decision would avoid a "political clash" during Spain's election campaign.

The European Commission also granted Italy the sought-after flexibility to deviate from its 2016 deficit target spending an extra 14 billion euros, in order to stimulate the economy and cover extra migration and anti-terrorism costs.

Italy is nevertheless expected to stay below the EU's 3-per-cent deficit ceiling. The budget shortfall is projected to stand at 2.3 per cent of GDP this year; it would have had to fall to about 1.4 per cent without Wednesday's reprieve.

In return, the European Commission asked Rome to adopt more rigorous fiscal policies next year, and warned that it would pass judgement on the country's draft budget plans for 2017 in October, ahead of their approval by parliament.

The decision is a major political result for Italy's leftist Prime Minister Matteo Renzi, who has been leading the charge in the EU against Berlin-sponsored attempts to enforce stricter policing of deficit rules.

"Auf Wiedersehen austerity," was Wednesday's front-page headline of the l'Unita, the official newspaper of Renzi's Democratic Party.

In Brzeski's view, "Italy can probably be regarded as the biggest winner of today’s announcement," while Italian Economy Minister Pier Carlo Padoan said in Rome it was "not a question of winners or losers," but of a more sensible application of austerity constraints.

Speaking to RAI public radio, Padoan confirmed pledges to cut debt - now at a record 133-per-cent of GDP - and trim the deficit to 1.8 per cent of GDP next year. "It is not easy, but we made a commitment and we will continue [to commit ourselves]" he said.

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