Eurozone slams Spain, Portugal on excessive deficits

A man holding a Portuguese flag at a May Day march by the CGTP union in Lisbon, Portugal. The country has been chastised by the European Union for breaching EU public spending rules.
A man holding a Portuguese flag at a May Day march by the CGTP union in Lisbon, Portugal. The country has been chastised by the European Union for breaching EU public spending rules.PHOTO: REUTERS

BRUSSELS (AFP) - Eurozone finance ministers agreed on Monday to officially declare Spain and Portugal in breach of the European Union public spending rules, a key step to possibly imposing unprecedented penalties against members of the currency bloc.

The ministers took the rare step despite fears that too much austerity by Brussels will further stoke anti-EU populism after the Brexit vote.

The eurozone ministers followed the recommendation of the European Commission, the EU's executive arm, which last week officially said Spain and Portugal had done too little to fix their deficits.

"The eurozone members tomorrow...will vote to support the commission's recommendation unanimously," said Jeroen Dijsselbloem, who leads the group of 19 finance ministers from EU countries that use the euro.

With the decision, which will be formally endorsed by the 28 EU finance ministers on Tuesday, the commission now has 20 days to prepare penalties.

But Spain and Portugal are widely expected to deliver an official request for zero-sanctions within 10 days that would include a firm commitment by the countries to fix their budget.

"We will engage in dialogue with the ministers of the states concerned," said Economics Affairs Commissioner Pierre Moscovici.

Many EU powers, led by Germany, have long hoped for the commission to crack down on public overspenders, even amid the fallout of the British vote to quit the bloc and a poor economy.

A decision by the 19 ministers of the single currency to punish the two countries would be an unprecedented step, and would put attention on overspending France, which is on course to break the rules next year.

French Finance Minister Michel Sapin said on Monday Portugal does not deserve punishment on its budget and argued the commission should take a light touch.

"Portugal has made enormous efforts in the past years. It does not deserve excessive discipline," said Sapin ahead of the talks.

France's plea for leniency came after Germany recently warned Portugal against making "a serious mistake" by flouting the rules.

Those remarks by German Finance Minister Wolfgang Schaeuble angered Portugal, which summoned Germany's ambassador to Lisbon in protest.

"I think that we all agree...the rules must be applied," Mr Schaeuble said on Monday.

The often-broken rules call for budget deficits not to exceed 3 per cent of gross domestic product.

Spanish Finance Minister Luis de Guindos firmly defended his country's record, where the deficit was slashed from a towering 10.4 per cent of GDP in 2012 to half that in less than four years.

"The reason I am optimistic is the sheer nonsense that a fine against Spain would signify," Mr de Guindos said ahead of the talks.

Under EU rules, the commission could impose fines of up to 0.2 per cent of gross domestic product on eurozone countries that repeatedly ignore the deficit limits - but to date it has not dared using its full power.

Portuguese Prime Minister Antonio Costa warned last week that imposing a fine would only embolden euroscepticism in the wake of Britain's decision to leave the European Union if Brussels applies sanctions.

Spain and Portugal have been under the EU's excessive deficit procedure since 2009 because of recurrent fiscal holes following the global financial crisis.

Bailed-out Portugal, long considered a star reformer, also sharply cut its budget deficit from close to 10 per cent of GDP in 2010 to 4.4 per cent last year, but that still overshoots targets and the bloc's limit.

Spain, while avoiding a eurozone bailout, suffered through six years of recession.

In 2015 it reported a deficit of 5.1 per cent of gross domestic product (GDP), still way off the target of 4.2 per cent set by the commission and the normal 3.0 per cent limit.