The Strategist

Sanctions for Spain and Portugal

07/12/2016 - 15:31

The Economic and Financial Affairs Council (ECOFIN) on Tuesday admitted that Spain and Portugal, the euro area members, failed to take actions sufficiently effective to reduce their budget deficits. Thus, the council agreed with the European Commission's opinion. This automatically starts the process of imposing sanctions against those countries.

Carlos Delgado
Carlos Delgado
"The European Commission has 20 days to submit a recommendation on the introduction of penalties, which should be 0.2% of GDP, to the Council. However, Portugal and Spain in ten days may submit reasoned requests for reduction of the fines", - reads the statement.

Then, the European Council will have to approve the fines within ten days.

Spain and Portugal have not reached necessary budget figures. That is why they are facing fines of up to 0.2% of GDP and reduced financial receipts from the European funds. Once again, EU officials found themselves in a difficult situation. To impose the sanctions means to strengthen the Eurosceptics’ position, but rejection of them will hit the Federal government’s image of a financial regulator.

"Lately the countries have walked back from correcting high deficits, and failed to meet budget targets", - said vice-chairman of the commission Valdis Dombrovskis.

Portuguese politicians have already responded to the claims. Head of Bloco de Esquerda (Left Bloc) party Catarina Martins said that Portugal thus will be punished for the left-wing government, opposing the austerity measures. Portuguese Prime Minister Antonio Costa, quoted by The Wall Street Journal, said his country does not deserve sanctions, and could reach the necessary budgetary values this year.

At the peak of the crisis, in 2009, the Spanish budget deficit was 11% of GDP. Before, they set the goal in 2015 to reduce it to 4.2% of GDP, but only managed to reach 5.1% of GDP.

In Portugal, the budget deficit has decreased much more. The greatest discrepancy between incomes and expenditures of the Portuguese was in 2010, and amounted to 11.2% of GDP. In 2015, they were able to cut the margin to 4.4% of GDP. Leaving out spending on sanitation of troubled Portuguese bank, it’s 2.8% of GDP. However, even this is below the target of 2.5% of GDP, set by the European Commission. In 2015, Lisbon has reduced the debt’s level to 129% of GDP, against 130% a year earlier.

At the same time, the European Union’s Stability and Growth Pact for national governments sets fiscal constraints. According to the document, the budget deficit should not exceed 3% of GDP. Another criterion is that the amount of public debt should not exceed 60% of GDP.

If the figures are infringed, the European authorities form a plan to reduce debt and deficits for the governments. the European Commission then controls budgets of the participating countries and implementation of the recommendations set out by the Board of Finance Ministers.

Failure to follow the instruction may entail fines, depending on the volume of GDP, and freezing of funds the countries receive within the European Fund for Strategic Investments (EFSI).

According to the rules, the penalties for exceeding the budget deficit up to 0.2% of GDP. For Spain, the maximum amount will be € 2.16 billion, and Portugal would get € 359 million. As for freezing financial assets of regional associations, it may reach 0.5% of GDP.