EU governments agree to waive fines for Spain, Portugal deficits

Spain and Portugal will not be fined despite failing to take effective action to whittle down their public deficits, EU member states announced Tuesday, taking into account mitigating factors in both countries.

The two cases had left the European Union walking a tightrope between credibility in applying budget rules and ensuring that its actions do not hamper the bloc's fragile economic recovery, which is already set to be battered by British plans to leave the bloc.

Under EU rules, member states are supposed to limit their deficits to 3 per cent of gross domestic product (GDP).

The bloc's rules allow for eurozone members to face penalties as high as 0.2 per cent of GDP for higher-than-allowed deficits. That would have amounted to more than 2 billion euros (2.2 billion dollars) for Spain and nearly 200 million euros for Portugal, according to the European Commission.

Portugal was supposed to bring its deficit down to 3 per cent last year, but failed to do so. Spain had until the end of this year to comply with the guideline, but is not on track to meet the target.

EU governments agreed to grant Portugal an extra year and thus until the end of 2016 to reduce its deficit, while giving Spain two extra years, until 2018.

Last month, the commission recommended waiving fines in both cases, taking into account the fiscal consolidation and reform efforts made by the two countries in recent years, as well as social challenges they face.

EU member states had until Monday to decide whether to approve, amend or reject the advice of the bloc's executive. It would have required a majority of eurozone countries - excluding Spain and Portugal - to overrule the recommendation.

Portugal is now expected to bring its deficit down to 2.5 per cent of GDP this year, by carrying out an additional 0.25 per cent of GDP in fiscal consolidation and taking "further measures" if necessary, member states said in a statement.

They called on Spain to reduce its deficit to 4.6 per cent of GDP this year, 3.1 per cent of GDP in 2017 and 2.2 per cent of GDP the year after. This will require additional savings worth 0.5 per cent of GDP in both 2017 and 2018, the statement said.

Spain has been in political limbo following two inconclusive elections within seven months.

Both countries must take effective action by October 15 and provide a report by that date, or else risk the suspension of regional aid - a measure foreseen for deficit sinners under EU rules.

The commission said it would issue a recommendation on this for Spain and Portugal in the coming months, after consulting with the European Parliament.

"Effective action by Spain and Portugal will be a necessary condition to lift the suspension of [regional aid] commitments," commission Vice President Valdis Dombrovskis warned Tuesday.

The EU has long struggled with member states running afoul of its budget rules. Germany and France had for instance led a successful move in 2005 to water down the EU deficit rulebook, which has since been strengthened.

Last update: Tue, 09/08/2016 - 10:56

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