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18th Aug 2018

Spain and Portugal likely to face fines over deficit

  • A deficit procedure against Spain could weaken prime minister Rajoy (r) ahead of the 26 June election, while Italy's Renzi (l) will get more leeway (Photo: The Council of the European Union)

The European Commission is to grant Italy budget flexibility but is expected to launch procedures to fine Spain and Portugal for their excessive deficits, when it publishes its specific country recommendations on Wednesday (18 May).

"Europe has recognised a further element of flexibility," Italian prime minister Matteo Renzi said on Tuesday.

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He said letters were being exchanged between the commission and his government to set the budget margins the commission will allow for Italy in 2016 and 2017.

In one of the letters, sent last week to Italian finance minister Pier Carlo Padoan and seen by EUobserver, EU finance commissioners Valdis Dombrovskis and Pierre Moscovici said they were ready to grant Italy a flexibility of 0.85 percent of GDP for 2016, under the condition that Italy reduces its deficit by a further 0.5 percent in 2017 and 2018.

"It must be recalled that no other member state has requested or received anything close to this unprecedented amount of flexibility," the commissioners wrote.

The budget margins would be granted in compensation for the structural reforms, and investment decided by the Italian government as well as the cost of the migrant crisis and "exceptional costs directly related to the security situation".

In their letter, Dombrovskis and Moscovici say the commission "supports Italy's ambitious programme of structural reforms" and acknowledges that "reducing the public debt-to-GDP ratio is one of the [Italian] government's key economic policy goals, together with deficit reduction".

The decision to grant Italy leeway has to be formally taken by the college of commissioners on Wednesday morning, but it was already announced by Renzi on Tuesday.

The Italian PM said the margins granted were "less than I would have wished for but it is an important fact, recognition for the whole country".

"We have achieved a significant, important accord. It's not the solution to all ills but it affirms a principle: on flexibility, Europe is there," he said.

For Spain and Portugal the prospects look less positive. EU sources have been suggesting that the commission could set deadlines for specific measures both countries would have to take to reduce their deficit.

It they fail, procedures for excessive deficits would be launched. The two countries would risk a fine up to 0.2 percent of their GDP.

Implement the rules

Spain and Portugal are difficult political cases.

In Spain, prime minister Mariano Rajoy is fighting for re-election in June after an inconclusive vote last December.

Rajoy, a member of the centre-right European Popular Party (EPP), is an ally of commission president Jean-Claude Juncker and vice-president for the euro Dombrovksis.

The Spanish budget last autumn was the subject of political infighting when social-democrat finance commissioner Moscovici wanted to publish the commission's opinion on the budget and Dombrovskis said more time was needed.

The report was published a week later and said Spain was "at risk of non-compliance with the provisions of the stability and growth pact".

Commissioners will now have to say whether a process should be launched against Spain.

The decision has split the EPP. In early May, the head of the EPP group in the European Parliament Manfred Weber wrote a letter to Juncker asking the commission to "strictly implement" the rules and punish countries that do not respect them.



Weber later explained to Spanish radio Cadena Ser that he had said he wanted the commission, when it decides about Spain, to take into account "the cost of populism and extremism".

Weber was referring to the radical left party Podemos, which is gaining ground in opinion polls ahead of the 26 June election.

Juncker himself is said to be wary of sanctioning Rajoy. An alternative would be that the commission launches a procedure with a fine much lower than 0.2 percent of GDP.

Rajoy himself, in an interview with the Financial Times on Wednesday, said he was committed to reducing the deficit. But at the same time he upped the ante, announcing he would cut taxes if he was re-elected in June.

Political balance

Portugal is a very different case. Antonio Costa, a social-democrat, became prime minister last autumn after the outgoing prime minister and EPP candidate Pedro Passos Coelho came first at the general election but failed to have a majority.

Costa, allied with communists, Greens and a radical left party, has pledged to lead Portugal out of the austerity policies conducted after the country received a €79-billion bailout from the EU and the International Monetary Fund.

Since Costa came to power, the commission has stressed the good cooperation between Lisbon and Brussels.

But while the commission wants to avoid suggesting that the bailout did not improve the situation, the college of commissioners is split between members who want to let Costa develop more social policies and members who do not want to let a leftist government off the hook if budget targets are not met.

For the commission, launching parallel procedures against Spain and Portugal might be a way to find a political balance.

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