European Commission to not impose sanctions on Spain and Portugal

The European Commission on Wednesday backed away from slapping fines on Spain and Portugal for running high deficits, avoiding what would have been a landmark move to impose tough budget rules.

The decision was made by the college of Commissioners after Spain and Portugal both pleaded for clemency in letters to the European Union executive.

“Sanctions, even symbolic ones, would not have been understood by the public”, Economic Affairs Commissioner Pierre Moscovici, said at a news briefing. The EU executive could have imposed fines of up to 0.2 per cent of gross domestic product (GDP) against Madrid and Lisbon. If a government fails to take steps to meet the deadline, it can be fined.

Portugal was meant to cut its deficit to below 3 percent previous year, but the gap turned out to be 4.4 percent. The Portuguese budget deficit has been on a downward trend, he noted.

Spain faces a fine of up to almost 2.2 billion euros ($2.4 billion), while Portugal is on the hook for 360 million euros, based on GDP data for 2015.

But while the government projects growth of 1.8 percent, most economists expect a much lower expansion around 1 percent. Moscovici said that cancelling the fines was the best possible solution and would not threaten the credibility of Stability Pact regulations. “Fiscal consolidation, growth and employment are priorities for Spain”, Rajoy tweeted after the decision. “A punitive approach we didn’t feel would have been most appropriate at a time when people are questioning Europe”.

“It is disappointing that there is no follow up on the conclusion that Spain and Portugal did not take effective action to consolidate their budgets, Dijsselbloem said in a statement”.

The Commission said it would start a discussion on a partial freeze of the structural funds that would normally go to Spain and Portugal in 2017 in September, after the European Parliament – which has to be consulted – returns from its summer break.

“It shows that politics trumps the rules at the end of the day”, he added.