DEFICIT SANCTIONS

Finance Ministers Cave on Spain, Portugal

A seagull flies past the Spanish flag in front of the congress hall, venue of the Ibero-American Summit, in Cadiz, southern Spain November 15, 2012. Leaders meeting at the summit, which will take place from November 16 to 17, face a relationship that has changed profoundly in the past few years, with impoverished Spain and Portugal hoping that booming Latin America can help lift them out of economic crisis. REUTERS/Jon Nazca (SPAIN - Tags: POLITICS BUSINESS)
Finance ministers have agreed to take it easy on Spain and Portugal.
  • Why it matters

    Why it matters

    Critics argue failing to sanction Spain and Portugal turns E.U. deficit rules into a dead letter.

  • Facts

    Facts

    • In July, the European Commission agreed to waive financial sanctions against Spain and Portugal for violating the bloc’s rules on budget deficits.
    • The E.U. finance ministers could overturn the commission’s decision, but they lack a sufficient majority to do so. Even Germany’s finance minister has opposed sanctions.
    • Though Spain and Portugal have dodged financial sanctions, Brussels could still withdraw their structural funds.
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    Audio

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The European Union’s finance ministers will not overturn a decision by Brussels to forgive Spain and Portugal for violating budget deficit rules, according to a document obtained by Handelsblatt.

In July, the European Commission, the E.U. executive body, waived financial sanctions against Madrid and Lisbon for failing to maintain budget deficits below 3 percent of GDP. Germany’s finance minister, surprisingly, agreed to back the leniency.

The E.U. finance ministers had until August 8 to either amend or reject the commission’s decision. Under a rules change, overturning a decision by the commission now requires a qualified majority of 16 out of 28 member states representing 65 percent of the European Union’s total population.

Italy, France and Germany are all opposed to imposing financial sanctions against Spain and Portugal.

The rule was originally implemented to make it more difficult for the member states to overturn E.U. deficit sanctions. But in this case, Brussels’ decision to waive penalties against Spain and Portugal meant the finance ministers needed a qualified majority to punish the two countries.

In a letter obtained by Handelsblatt, the German Finance Ministry’s state secretary, Jens Spahn, told the Bundestag that several finance ministers were critical of the commission’s leniency but they lacked the majority required to amend or overturn Brussels’ decision.

Italy, France and Germany are all opposed to imposing financial sanctions against Spain and Portugal. In a surprise move, German Finance Minister Wolfgang Schäuble, typically known as a deficit hawk, personally intervened last month and lobbied the commission to waive sanctions against Madrid and Lisbon.

The European Commission has, however, threatened to withdraw structural funds for the two countries if they don’t implement austerity measures. Mr. Spahn’s letter said the commission hasn’t made an official proposal yet on withdrawing structural funds, but is expected to do so soon.

Under the E.U. Stability and Growth Pact, member states are required to keep their annual budget deficits under 3 percent of gross domestic product. Failure to abide by this requirement can result in sanctions equal to 0.2 percent of the violator’s GDP or the suspension of structural funds.

Spain faced a maximum of more than €2 billion ($2.2 billion) in fines, while Portugal faced almost €200 million.

No E.U. member state has ever faced financial sancitons for violating deficit rules. France and Germany have both violated the rules without facing consequences. Last year, Paris was granted two years to bring its deficit into compliance with the rules.

When asked why Paris was granted leeway, E.U. Commission President Jean-Claude Juncker simply said, “because it’s France.”

 

Ruth Berschens is Handelsblatt’s bureau chief in Brussels. Jan Hildebrand is Handelsblatt’s chief political correspondent in Berlin. To contact the authors: berschens@handelsblatt.com and hildebrand@handelsblatt.com

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