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Photograph: Photo by Clker-Free-Vector-Images, used under CC0

Portugal and Spain have failed to take effective action to whittle down their public deficits, EU finance ministers confirmed Tuesday as they gave the two countries 10 days to present arguments on why they should not be hit with fines.

The two cases have 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 due to British plans to leave the EU.

Member states are supposed to limit their deficits to 3 per cent of gross domestic product (GDP), a requirement that, in the eurozone, can be enforced with fines.

Portugal was supposed to reach that goal last year, while Spain has until the end of 2016, but is off track. The fiscal efforts by the two former bailout recipients fell "significantly short of what was recommended," EU finance ministers said in a joint statement Tuesday.

"The decision proves that the rules are being applied. That sends a signal of reliability," German Finance Minister Wolfgang Schaeuble said.

"Reducing high deficit and debt levels is a precondition for sustainable economic recovery and growth for both countries," European Commission Vice President Valdis Dombrovskis noted.

However, officials also acknowledged mitigating factors in both cases. Spain has been grappling with political paralysis after two inconclusive elections within seven months, while Portugal had to contend with a bank recapitalization.

"There is a signal that would be bad, which is that there no longer exist any rules, especially in the eurozone. And there is another signal that would be bad, which is wanting to sanction for the pleasure of sanctioning," French Finance Minister Michel Sapin said.

"I am sure that we will have a smart, intelligent result at the end," added Slovak Finance Minister Peter Kazimir, whose country currently holds the EU's rotating presidency.

The commission, the bloc's executive, indicated last week that fines for both countries - which under the bloc's rules can reach up to 0.2 per cent of GDP - could be whittled down to zero.

EU rules also foresee a suspension of regional aid, but Dombrovskis noted that this would only apply from next year, leaving time for the two countries to "react and avoid losing any EU funds."

Spanish Economy Minister Luis de Guindos declared himself convinced in Brussels that "there will be no sanctions."

To push down the deficit, Madrid will commit to increasing its corporate tax to achieve another 6 billion euros (6.6 billion dollars) in revenues and stepping up the fight against tax evasion to bring in 1 billion euros, de Guindos told broadcaster RNE.

"In 2017, Spain will meet the deficit limit of 3 per cent," he said.

Portuguese Prime Minister Antonio Costa, meanwhile, warned that sanctions against Lisbon and Madrid would be "unjustified" and that their effect would be "profoundly counterproductive."

Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup panel of eurozone finance ministers, called on the two countries to strive for "an offensive reaction, talking about what will be done to deal with the problems, rather than a defensive reaction."

The commission now has 20 days to issue a recommendation on fines, taking into account Madrid and Lisbon's input. EU governments would then have 10 days to approve the recommendation.

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