EU agrees to waive fiscal fines for Spain and Portugal

9 Aug 16

Spain and Portugal have escaped fines for breaking European Union deficit rules, the European Council have confirmed.


The council accepted the European Commission’s proposal not to fine the two countries yesterday, and set new deadlines for both to correct their deficits, which are above the ‘safe’ level of 3% GDP defined by EU fiscal rules.

Portugal still only has until the end of the year to bring its deficit down to 2.5% of GDP, from 4.4% at the end of 2015 when its previous deadline expired. The council noted that the country’s “fiscal effort fell significantly short” of council recommendations that time around.

That was the second time the nation had missed its deadline. When Portugal became subject to the EU’s excessive deficit procedure in 2009, the council originally set a deadline of 2013. But by 2012, Portugal’s deficit stood at 6.4%.

The council noted that “thanks to policy measures taken in its 2016 budget”, Portugal’s general government deficit is expected to fall below 3% this year.

However, it has set the country a limit of 2.5% due to uncertainties around “economic and budgetary developments”. This will require Portugal to make an adjustment equal to 0.25% of GDP.

“All windfall gains must be used to accelerate deficit and debt reduction, and Portugal must be ready to adopt further measures should budgetary risks materialise,” a statement by the council added.

Spain, which has consistently missed every target set by the council under the excessive deficit programme so far, and has had its deadline extended twice, has also had new goals and requirements set by the council.

The council has called on the country to reduce its deficit to 4.6% of GDP this year, 3.1% in 2017 and 2.2% in 2018.

“Granting Spain one additional year to correct its deficit would require a structural balance adjustment that would have too negative an impact on growth,” the council said, explaining its decision to opt for a two year extension.

Spain’s deficit is currently forecast to stand at 3.3% for 2017 and 2.7% in 2018, and the council said its targets will require Spain to make changes equal to 0.5% of GDP in both.

Spain had been due to correct its deficit this year, however the council said Spain is not on track. Again it said the country’s efforts had fallen far short, and highlighted a relaxation of fiscal policy in 2015 as having a particular impact on the country’s fiscal outcome that year, with the deficit at 5.1% of GDP compared to a target of 4.2%.

Both Spain and Portugal must take “effective action” by 15 October and submit a fiscal report by that date.

Spain in particular may struggle after two inconclusive national elections, the most recent of which took place in June, preventing the formation of a government.

The countries may also still face a suspension of some EU funding as a result of their deficits. The commission delayed a decision on this, and is due to take up the matter again following the summer break.

Pierre Moscovici, commissioner for economic and financial affairs, said yesterday’s decisions reflect an “intelligent application” of relevant EU rules, known as the Stability and Growth Pact.

“By giving more time to Spain and Portugal, the council sets new credible fiscal trajectories, which will contribute to strengthening both their economies and the euro area,” he said.

“Stability and growth require a strong determination to put public finances in order. I trust that Spain and Portugal will respond accordingly to the decisions.”

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