Spain and Portugal win clemency over breaking EU fiscal rules

EU governments have drawn a final line under months of squabbling over the excessive budget deficits of Spain and Portugal, after they agreed to give the two countries additional time to hit their targets and to waive any fines.

Member states that are part of the single currency area had until midnight on Monday to raise their objections to the proposal – but none did.

The decision to grant clemency to Madrid and Lisbon has sparked sharp political controversy, especially in Germany, where some have voiced concern that the persistent failure to punish countries with an excessive deficit is undermining the credibility of the euro zone.

Jens Weidmann, the president of Germany's Bundesbank, warned in an interview last week that "breaking the rules must have consequences at some point. In my view, the European Commission and the Council [of EU member states] are not sufficiently consistent."

But member states ultimately took a different view, mindful of the potential political fallout of any decision to impose fines on crisis-hit countries where anti-austerity sentiment is already running high.

Both Spain and Portugal have repeatedly missed their budget deficit targets since 2009. In other ways, however, they are seen as relative economic success stories: both have bounced back from an unusually harsh recession, unemployment is falling and Spain in particular is experiencing strong economic growth.

Madrid argued repeatedly in recent weeks that it would be “paradoxical” to punish a country that has pushed through deep economic reforms and that saw its economy expand by 3.2 per cent last year – almost twice as fast as the euro zone average.

Under an earlier deal with the commission, Spain was supposed to bring its government deficit below 3 per cent of gross domestic product this year. That target moved out of reach after Madrid fell short of its intermediate targets both in 2014 and last year. Under the new accord, Spain must reduce its budget shortfall to 4.6 per cent this year, 3.1 per cent in 2017 and 2.2 per cent in 2018 – effectively giving Spain two extra years to meet its target.

“Granting Spain one additional year to correct its deficit would require a structural balance adjustment that would have too negative an impact on growth. The council therefore considers it adequate to extend the deadline by two years,” the council said in a statement on Tuesday.

Portugal was already supposed to reduce its deficit to below 3 per cent of GDP last year, but ultimately emerged with a shortfall of 4.4 per cent. Like Spain, however, it will now escape a fine for the infringement.

Under reinforced budget rules, Brussels has the power to impose a maximum financial punishment of 0.2 per cent of GDP, which would amount to €2 billion for Spain and more than €300 million for Portugal. The two countries could, however, still lose out on regional aid funds from the European Commission as part of the sanctions process.

The council decision formally endorses a proposal made by the commission last month. Pierre Moscovici, EU economics commissioner, said at the time that the move recognised the tough fiscal consolidation already carried out in each country. He also indicated the move was partly motivated by waning popular support for the EU institutions.

"I think we took the wisest decision in economic terms. Even a symbolic fine would not have been understood by people," he said. "A punitive approach would not be the right one at a time when people doubt in Europe. "

– Copyright The Financial Times Limited 2016