Commission Compassion

No Bite, Just a Little Bark

epa03479472 President of the Euro group, Luxembourg's Prime Minister Jean-Claude Juncker (R) and French Finance Minister Pierre Moscovici chat during the Euro Group finance ministers council at the EU headquarters in Brussels, Belgium, 20 November 2012. Greece awaited an expected eurozone finance ministers' decision on 31.5 billion euros (40.4 billion dollars) bailout money, amid disagreements on how to get the country's finances back in shape. EPA/OLIVIER HOSLET EPA/OLIVIER HOSLET +++(c) dpa - Bildfunk+++
Commission president, Jean-Claude Juncker, and economics commissioner, Pierre Moscovici, gave Spain and Portugal a reprieve.
  • Why it matters

    Why it matters

    The European Commission’s decision to postpone disciplinary action against Spain and Portugal for breaking E.U. budget rules could fuel criticism that the bloc’s fiscal regime is a toothless tiger.

  • Facts

    Facts

    • The European Commission on Wednesday said it won’t decide on disciplinary action against Spain and Portugal until after Spain’s June 26 election.
    • The Commission has never imposed a fine before, despite repeated budget breaches by member states over the years.
    • Italy was also given more budgetary leeway while fiscal paragon Germany was told to cut its current account surplus which amounted to a “macroeconomic imbalance.”
  • Audio

    Audio

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Spain and Portugal got away with it: The European Commission Wednesday decided to postpone a decision on disciplinary action against the two countries for running excessive budget deficits.

“We have concluded that this is not the right moment economically or politically to take this step,” Pierre Moscovici, the economic affairs commissioner, said.

The decision marks a U-turn after both Mr. Moscovici and Commission Vice President Valdis Dombrovskis had just a few days ago appeared determined to push ahead with proceedings against both countries which would have made financial penalties unavoidable for the first time in the 17-year history of Europe’s monetary union.

Any fine would likely have been symbolic, but the countries would have faced cuts in their access to E.U. structural funding for 2017.

The two countries owe their reprieve largely to Commission President Jean-Claude Juncker, who had pushed for a decision to be delayed until after the Spanish general election on June 26, said officials in Brussels.

The Commission plans to reexamine the issue in at the start of July. Spain and Portugal could use the postponement to avoid punishment once and for all. All they have to do is promise to undertake spending cuts and structural reforms. The Commission had on Tuesday already decided to give them more time to get their budgets back in order.

Portugal’s left-wing government has been told it must lower this year’s budget deficit below the ceiling of 3 percent of gross domestic product set by the Stability and Growth Pact, the 1997 accord designed to underpin the European single currency by enforcing fiscal discipline in the bloc.

“We propose that each country receives one extra year, and one extra year only. The new deadline for Portugal will be 2016, and for Spain 2017.”

Pierre Moscovici,, Economic affairs commissioner

The Commission believes it can do so — according to the E.U.’s spring forecast, the Portuguese deficit will fall to 2.7 percent of GDP in 2016. Spain was told to get its deficit below 3 percent in 2017.

“We are proposing new deadlines for both countries to correct their excessive deficits,” said Mr. Moscovici. “We propose that each country receives one extra year, and one extra year only. The new deadline for Portugal will be 2016, and for Spain 2017.”

Critics have said the Stability Pact is a toothless tiger because no member state has ever been punished even though plenty, including Germany, have broken the rules. Last year, the Commission gave France two more years to get its deficit below the ceiling.

epa03923711 Spanish Prime Minister Mariano Rajoy at the second day of a European head of states summit in Brussels, Belgium, 25 October 2013. EPA/OLIVIER HOSLET +++(c) dpa - Bildfunk+++
Acting Spanish Prime Minister Mariano Rajoy has promised tax cuts ahead of the June election. Source: DPA

 

Spain’s acting prime minister, Mariano Rajoy, who has been in charge of a caretaker government ever since an inconclusive election last December, doesn’t appear to be taking the Commission’s warning particularly seriously. The conservative leader on Wednesday reiterated a pledge to cut taxes after the election.

But he may not be able to fulfil that promise because analysts say he’s unlikely to win the election after a series of corruption scandals in his People’s Party. The Spanish central bank is concerned that the June election may fail to produce a clear majority and that Spain will remain dogged by political uncertainty.

19 p7 Breaking the E.U. Rules-01

 

The Commission also bowed to Italy’s request to be given greater budget leeway to revive weak economic growth and cope with the cost of an influx of refugees.

The Italian economics ministry this week published a letter sent to it by the Commission granting Italy most of the flexibility it had requested for this year, but warning that Rome needs to take additional deficit-cutting measures in 2017.

The letter said Italy could increase its previously agreed deficit goal in 2016, giving it additional budget “flexibility” amounting to 0.85 percent of GDP, or around €14 billion. “It must be recalled that no other (E.U.) member state has requested nor received anything close to this unprecedented amount of flexibility,” it said.

Germany, meanwhile, a paragon of fiscal virtue in recent years which posted budget surpluses in both 2015 and 2014, got told off again for running a high current account surplus which the Commission called a “macroeconomic imbalance” that it should remove.

The Commission also called on the E.U.’s largest economy to increase public investment “especially in infrastructure, education, research and innovation.” Germany had the financial means to do so and should use it, the Commission said.

 

Ruth Berschens is the Handelsblatt’s bureau chief in Brussels. Sandra Louven is the paper’s Madrid correspondent. To contact the authors: berschens@handelsblatt.com, louven@handelsblatt.com

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