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EU declares Spain, Portugal in violation of budget rules

The European Commission on Thursday officially declared Spain and Portugal in violation of the EU public spending rules, the first step towards what would be unprecedented penalties against members of the bloc.

The commission, the EU’s executive arm, set the countdown to possible sanctions despite fears that austerity orthodoxy by Brussels will further stoke anti-EU populism in the wake of the Brexit vote and slow a weak economic recovery.

Many EU powers led by Germany have long hoped for the commission to finally crack down on public overspenders, but with populist fires burning after the UK referendum, ministers meeting in Brussels on Tuesday could decide to delay their endorsement.

Spain and Portugal are accused of moving too slowly towards meeting the EU’s deficit limit of three-percent of national output, the bloc’s executive arm said.

“Lately, the two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets,” said Valdis Dombrovskis, the EU Commission’s vice-president in charge of the euro.

If endorsed by the EU’s finance ministers, the commission then has 20 days to propose fines against the two neighbouring countries, which were both hit hard by the financial crisis.

The commission would also begin proceedings to block EU development financing to the countries.

“It is now for EU ministers to confirm our assessment very soon,” said Economics Affairs Commissioner Pierre Moscovici at a news briefing.

The commission could then impose fines of up to 0.2 percent of gross domestic product on eurozone countries that repeatedly ignore the rules. This must also be backed by the EU ministers.

The commission could easily demand “zero sanctions”, added Moscovici, a former French finance minister.

Portugal declared the commission’s announcement a “diplomatic victory” as it fell short of a specific recommendation to sanction Lisbon.

Ahead of the announcement, Portuguese Prime Minister Antonio Costa warned that Brussels would only embolden euroscepticism if EU sanctions are applied.

Costa cited “the results of the UK referendum” as a reason to refrain from full implementation of the rules.

In Spain, meanwhile, parties are negotiating to form a government after a second round of elections last month proved inconclusive.

But the current Spanish economy minister, Luis de Guindos, said he did not think sanctions would be brought against Spain as it is “the eurozone economy which has grown the most, the country which has put in place the most economic reforms.”

– ‘Done too little’ –

Jeroen Dijsselbloem, the Dutch finance minister who is the influential chief of eurozone finance ministers, however said that EU ministers would have no choice but to penalise the countries.

“If I look at the figures I really have to conclude that Spain and Portugal have done too little…There automatically has to be sanctions,” Dijsselbloem said in Dutch parliament.

France and Italy will be the most willing to delay the penalty process, fearing that their own years of EU rule breaking would put them next in line for a sanction by Brussels.

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

Spain last year reported a deficit of 5.1 percent of gross domestic product (GDP), way off the target of 4.2 percent set by the commission and the normal 3.0 percent limit.

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