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Photograph: Pixabay.com / bykst

Spain and Portugal moved closer Thursday to being fined for breaching EU budget rules, as the European Commission found that both countries had failed to take effective action to whittle down their deficits.

But any penalties imposed on Lisbon or Madrid could effectively amount to zero, said commission Vice President Valdis Dombrovskis and Economy Commissioner Pierre Moscovici, noting that their goal was to encourage reforms, not "punish."

The European Union's executive is walking a tightrope between being credible in applying the bloc's rules and ensuring that its actions do not hamper the bloc's fragile economic recovery.

Members of the eurozone are supposed to limit their deficits to 3 per cent of gross domestic product (GDP) and their public debts to 60 per cent of GDP.

Portugal was meant to hit the 3-per-cent target last year, but its deficit reached 4.4 per cent of GDP.

Spain has until the end of 2016, but its deficit is expected to reach 3.9 per cent of GDP this year instead. Both countries were granted previous deadline extensions, and the commission is now proposing giving them each a further year to meet their targets.

"Spain and Portugal have come a long way since the beginning of the crisis," said commission Vice President Valdis Dombrovskis. "However, lately the two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets."

EU rules foresee a penalty of at least 0.2 per cent of GDP for deficit offenders within the eurozone, as well as a suspension of structural and investment funds, but the commission has never fined a member of the currency bloc.

On Thursday it moved closer to that step, by advising member states to take action against Spain and Portugal for failing to effectively bring down their deficit over the last two years.

EU finance ministers must now decide by a majority whether to adopt the recommendation. They next meet on Tuesday.

The issue is politically sensitive, with Portugal expected to bring its deficit in line this year, and Spain grappling with political paralysis after two elections within seven months have failed to produce an outright winner.

The commission had decided in May to postpone its verdict on Spain and Portugal until after the second set of Spanish elections, late last month.

Economic uncertainty following Britain's referendum decision to leave the European Union is also prompting greater caution, an EU diplomat said Thursday on condition of anonymity.

Should the ministers agree with the commission's assessment, it has 20 days to propose a fine. But the penalty could be reduced or even cancelled in the case of "exceptional economic circumstances" or if the country in question presents sound arguments within 10 days.

Spain is the eurozone's fourth-largest economy, enjoying strong growth after a banking crisis that required a 41-billion-euro (45.4-billion-dollar) public bailout and saddled the government with debt.

The economy in neighbouring Portugal returned to growth in 2014, three years after the country received a 78-billion-euro international bailout.

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