Despite internal wranglings at the European Commission, Spain and Portugal both have managed to avoid being fined for missing their agreed budget targets.
The European Commission decided not to fine the two countries because of the poor economic state of each and have postponed until September, but not cancelled, economic sanctions which could see 2017 EU funds curtailed, suspended or scrapped.
European Finance Ministers earlier had given to go-ahead for fines and sanctions but the Commissioners decided today that letters of intent from both countries were sufficient for each to avoid being fined.
Economic Affairs Commissioner Pierre Moscovic commented, “Even symbolic sanctions wouldn’t have allowed us to correct what had happened in the past and would have been hard to understand by populations that have undertaken significant efforts in recent years,”
“A punitive approach we didn’t feel would have been most appropriate at a time when people are questioning Europe,” continued Moscovic, aware that one of the more punitive proposals from Brussels is a rise of 1% in Portugal's VAT rate.
The EU’s fiscal rules have been exposed as being meaningless with the European Commission currently more worried that anti-EU sentiment will increase if Portugal and Spain were fined for consistently missing targets due to their inability to reign in State spending.
No country has been fined for exceeding their budget deficit target of 3% of GDP and keeping their debt ratios below 60%. Spain and Portugal have failed dismally to hit targets with Spain now pledging to constrict spending and to raise an additional €6 billion in corporation tax, but only by bringing tax payment dates forward.
The President of the Eurogroup, Jeroen Dijsselbloem said he was disappointed with the EC decision not to apply sanctions to Portugal and Spain.
"It is disappointing that there is no follow-up to the conclusion that Spain and Portugal have not adopted effective measures to consolidate their budgets," Dijsselbloem said.
"It must be clear that despite all the efforts made, Spain and Portugal are still in danger."
Jeroen Dijsselbloem also said he will expect the executive of the European Union to clarify its decision and discuss it with other eurozone countries.
Portugal has offered to freeze just €346 million in State spending in 2016 yet both countries' Finance Ministers have insisted they are fully committed to the European Union.
Augusto Santos Silva, Portugal’s Foreign Affairs Minister, said today’s decision was good news for Portugal and for Europe generally.
“Portugal is today on a clear route of budget consolidation, on a clear route of economic recovery and so any measure that would be counterproductive should be avoided,” he said, adding that the arguments used to avoid a fine were “very solid.”
Portugal’s President continued his run of inane and unhelpful comments by stating that the cancellation of penalties was a victory for the government and its opposition.
"The great lesson of this day is a simple one: when we Portuguese unite around just causes, we win," said Marcelo Rebelo de Sousa, in brief statement from Belém Palace in Lisbon, after which he refused to answer press questions.
"Today's decision to cancel the penalties for Portugal was a victory for Europe, a victory for Portugal and a win for responsibility," said the president, mentioning "diplomacy" and "support for the government from the opposition" and calling for increased attention to strengthening investment and the financial system, the implementation of European funds and compliance with the budgetary targets.
The President failed to observe that sanctions are still very much on the cards and that the governmment's inability to hit simple targets, mainly due to an absence of banking regulation and the subsequent serial collapse of major high street lenders, led to this highly embarrassing position.
Far from being a victory, the fact that the European Commissioners let Portugal and Spain off the expected fines was more to do with their not wanting to provoke any anti-EU sentiment or calls for referenda on EU membership.
The European Commission’s official statement on the Stability and Growth Pact concluded that today's action addresses past fiscal performance as well as the paths Spain and Portugal should now take to correct their excessive deficits.
“On 12 July 2016, the Council, acting under Article 126(8) of the Treaty on the Functioning of the European Union (TFEU), found that Spain and Portugal had not taken effective action in response to its recommendations on measures to correct their excessive deficits.
This unanimous Council decision legally obliged the Commission to recommend that the Council give notice to both countries to take measures to reduce the excessive deficit under Article 126(9) and establish a new fiscal path.
The Commission therefore today recommended that the Council decides on a new fiscal adjustment path for Portugal with a correction of the excessive deficit situation by 2016, while giving notice to Portugal to take effective action and to report on the action taken by 15 October 2016.
As a second consequence of the Council's decision on the absence of effective action, the Commission is legally obliged to present a proposal for a fine. Spain and Portugal submitted to the Commission a "reasoned request" to make their case within 10 days following the Council decision. The Commission is presenting today the results of the analysis of these requests as well as its recommendations. The Commission recommends today that the Council cancels the fine for Spain and Portugal.
The Council decision also legally obliges the Commission to propose a suspension of part of the commitments of EU Structural and Investment Funds for 2017. The Commission has invited the European Parliament to make use of a structured dialogue before it will present a proposal on this. This proposal will follow separately at a later date.
2. Why does the Commission need to recommend that the Council sets a new fiscal adjustment path for Spain and Portugal?
Spain has been in the corrective arm of the Stability and Growth Pact since April 2009 and was recommended to correct its excessive deficit by 2016. The deadline for correction was extended three times. According to the Commission 2016 spring forecast, Spain is expected to miss the headline deficit target for 2016. A revised deadline to correct the excessive deficit underpinned by an adjusted fiscal path is therefore needed. This needs to be specified in a new Council recommendation in the context of the Excessive Deficit Procedure. This recommendation would replace the 2013 Council recommendation addressed to Spain.
Portugal has been in the corrective arm of the Pact since December 2009 and was recommended to correct its excessive deficit by 2015. The deadline for correction was extended twice. Portugal has missed the deadline to correct its excessive deficit with a 2015 deficit of 4.4% of GDP, above the Treaty reference value of 3.0% of GDP and above the 2.5% the Council recommended in 2013. Therefore a new deadline to correct the excessive deficit, including a new fiscal path, is needed. This is done through a new Council recommendation in the context of the Excessive Deficit Procedure.
3. What fiscal path has the Commission recommended for Spain?
The Commission proposes for the Council to recommend that Spain puts an end to the present excessive deficit situation by 2018. Spain shall reduce its general government deficit to 4.6% of GDP in 2016, to 3.1% of GDP in 2017 and to 2.2% of GDP in 2018. This improvement in the general government deficit is consistent with a deterioration of the structural balance by 0.4% of GDP in 2016 and an improvement of 0.5% of GDP in both 2017 and 2018, based on the updated Commission 2016 spring forecast. Spain shall also use all windfall gains to accelerate the deficit and debt reduction.
In addition to the savings already included in the updated Commission 2016 spring forecast, Spain shall adopt and fully implement consolidation measures amounting to 0.5% of GDP in both 2017 and 2018. It shall also stand ready to adopt further measures should risks to the budgetary plans materialise.
4. What fiscal path has the Commission recommended for Portugal?
The Commission proposes for the Council to recommend that Portugal puts an end to the excessive deficit situation by 2016, and to reduce it to 2.5% of GDP in 2016. This improvement in the general government deficit is consistent with an unchanged structural balance compared to 2015, based on the Commission 2016 spring forecast. Portugal shall also use all windfall gains to accelerate the deficit and debt reduction.
In addition to the savings already included in the Commission 2016 spring forecast, Portugal shall adopt and fully implement consolidation measures amounting to 0.25% of GDP in 2016, and shall stand ready to adopt further measures should risks to the budgetary plans materialise.
5. Why is the proposal for the suspension of European Structural and Investment Funds (ESIF) commitments not part of today's package?
Unlike for the fine, there is no legally binding deadline for the Commission to propose the suspension of parts of the ESIF commitments for the following year (2017). The Commission has invited the European Parliament to hold a structured dialogue before presenting a proposal on this. This decision will follow at a later stage.
Structured dialogues aim to establish an open, frank and informal dialogue among partners. This is part of the regular bilateral dialogue between the Commission and the European Parliament, organised on a thematic basis between the Commissioners responsible for a particular policy area and the relevant European Parliament committee.
The idea underlying this macroeconomic conditionality is that the effectiveness of the ESI Funds should not be undermined by unsound fiscal and macroeconomic policies. At the same time, the suspension shall take into account the economic and social circumstances of the countries concerned. (see Annex III of the Common Provisions Regulation for the European Structural and Investment Funds (Regulation).
6. What is the legal basis for the fine and the suspension of ESIF commitments?
The maximum amounts of the fine and the partial suspension of funding commitments are set out in the relevant regulations and can be reduced if justified.
6.1 Fines
According to Article 6 of Regulation 1173/2011 as part of the so-called Six-Pack, the default proposal for a fine shall be 0.2% of GDP of the preceding year. However, the Commission can propose to reduce or cancel this amount if a country faces exceptional economic circumstances, or following a reasoned request from the Member State concerned.
6.2 Suspension of ESIF commitments
According to Article 23 of Regulation 1303/2013, the maximum level of suspended ESIF commitments is either 50% of the commitments for the next year, or 0.5% of nominal GDP, whatever level is lower. The scope and level of suspensions are detailed in Annex III of the Regulation.
7. What are the next steps?
The Commission makes several proposals to the Council today. It is up to the Council to adopt, amend or reject these proposals. As per Article 136(2) TFEU, only euro area Member States vote to adopt measures specific to euro area Member States. As per Article 126(13) TFEU, the concerned Member State does not vote. As euro area Member States have signed the Treaty on Stability, Coordination and Governance (TSCG), they have also committed themselves to support Commission recommendations on all aspects of Excessive Deficit Procedures on the basis of the deficit criterion for euro area Member States, as long as there is no qualified majority against the recommendations. This is applicable to the two types of proposals the Commission presents today.
7.1 Voting procedure for the proposals related to the cancellation of the fine:
As per Article 6 of Regulation 1173/2011, the Council has 10 days to reject the Commission's proposal by qualified majority of the countries whose currency is the euro (minus the country concerned). The voting rule is the so-called reverse qualified majority.
The Council, acting by a qualified majority, may also amend the Commission’s recommendation and adopt the text so amended as a Council decision.
7.2 Voting procedure for a new adjustment path under Article 126(9):
According to Regulation 1467/97 Article 5, any Council decision to give notice to the participating Member State concerned to take measures for the deficit reduction in accordance with Article 126(9) TFEU shall be taken within two months of the Council decision under Article 126(8) establishing that no effective action has been taken.
As the Council took the Article 126(8) decision on 12 July 2016, the decision under Article 126(9) is due by 12 September.
8. When and how will the action to be taken by Spain and Portugal be assessed?
The Council decision to give notice under Article 126(9) TFEU will contain the new fiscal adjustment path and the new deadline for correcting the excessive deficit. The Commission proposes a deadline of 15 October 2016 for both Member States to report to the Commission and the Council on the action taken. The Commission will take this report into account in its assessment of action taken.
The methodology to assess effective action has been endorsed by the ECOFIN Council of June 2014.
9. Why has the Commission recommended to cancel the fine? What elements did the Commission take into account?
According to Article 6 of Regulation 1173/2011 as part of the so-called six-pack, the Commission is legally required to propose a fine of 0.2% of GDP of the preceding year. However, this amount can be reduced or cancelled if a country faces exceptional economic circumstances, or following a reasoned request from the Member State concerned. While the Commission assessed that both Spain and Portugal did not experience exceptional economic circumstances, both Member States have submitted a reasoned request to cancel the fine, while reaffirming their commitment to comply with the rules of the Stability and Growth Pact.
In consideration of this, and in acknowledgment of the reform efforts of Portugal during its economic adjustment programme as well as in Spain in recent years following the financial assistance programme, the Commission proposed that the Council cancels the fines.
