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Spain, Portugal escape EU budget fines

(BRUSSELS) – EU Member States agreed Monday to waive fines on Portugal and Spain for failing to take effective action to correct their excessive budget deficits, setting new deadlines for corrective action.

Sanctions under the EU’s excessive deficit procedure had been triggered on 12 July, when the EU found that neither country had taken effective action to reduce its deficit below 3% of GDP – the EU’s reference value for government deficits.

Fines of up to 0.2% of GDP could have been imposed but, following reasoned requests from Portugal and Spain, the Commission proposed on 27 July to cancel the fines.

The EU’s Member States have now agreed to stand by the Commission’s proposal.

EU fiscal rules also require the Commission to propose a suspension of all or part of the EU’s structural and investment fund commitments or payments for 2017. The Commission postponed the proposal following talks with the European Parliament.

The new deadlines now set by the Council mean Portugal is required to correct its deficit by 2016, while Spain must do so by 2018 at the latest, with “effective action” being taken by 15 October this year, with both countries submitting a report.

Portugal has to reduce its general government deficit to 2.5% of GDP in 2016. It must implement consolidation measures amounting to 0.25% of GDP this year. All windfall gains must be used to accelerate deficit and debt reduction, and Portugal must be ready to adopt further measures should budgetary risks materialise.

Portugal exited its economic adjustment programme in June 2014 but missed an EU deadline as its general government deficit came out at 4.4% of GDP in 2015. Portugal didn’t correct its deficit by 2015 as required, and its fiscal effort fell significantly short of what the Council had recommended.

The country’s general government deficit is expected to fall below the 3% of GDP reference value this year. In the light of uncertainties regarding economic and budgetary developments however, the safety margin against breaching the reference value again is narrow. The Council considers therefore that a credible and sustainable adjustment path requires Portugal to attain a general government deficit of 2.5% of GDP in 2016.

Spain, for its part, now has to reduce its general government deficit to 4.6% of GDP in 2016, 3.1% of GDP in 2017 and 2.2% of GDP in 2018. In addition to savings already foreseen, Spain must implement consolidation measures amounting to 0.5% of GDP in both 2017 and 2018. All windfall gains must be used to accelerate deficit and debt reduction, and Spain must be ready to adopt further measures should budgetary risks materialise.

Spain exited the financial sector financial assistance programme in January 2014, using close to EUR 38.9 billion of loans for bank recapitalisation, plus around EUR 2.5 billion for capitalising the country’s asset management company.

However, general government deficits of 5.9% of GDP in 2014 and 5.1% of GDP in 2015 were above the intermediate targets set by the Council. Moreover, a relaxation of fiscal policy in 2015 had a large impact on the country’s fiscal outcome that year.

As a consequence, Spain is not set to correct its deficit in 2016 as required by the Council in its June 2013 recommendation. Its general government deficit is currently set to amount to 4.6% of GDP in 2016, 3.3% of GDP in 2017 and 2.7% of GDP in 2018, according to the Commission’s updated 2016 spring economic forecast. And the country’s fiscal effort has fallen significantly short of what the Council recommended.

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 considers that a credible and sustainable adjustment path requires Spain to achieve general government deficits of 4.6%, 3.1% and 2.2% of GDP in 2016, 2017 and 2018 respectively.

Article source: http://www.eubusiness.com/news-eu/spain-portugal-98ic

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