Spain avoids EU sanctions despite missing its deficit targets

In a surprising last-minute turn of events, following a tense meeting of over three hours, the European Commission on Wednesday decided to cancel sanctions against Spain and Portugal despite their continuous deficit target misses.

Spain had been pressuring for just such a move for days. Italy and France also opposed the sanctions for reasons of their own, in contrast with Germany, which had been defending tough action against target violators.

In the end, Brussels has found a way to avoid using the sanctions defined in the Stability Pact against two of the countries that have been hardest hit by the financial crisis and which have enacted more cuts than anyone else.

The decision to punish would not have been the best one to take at a time when people are questioning Europe

EU finance commissioner Pierre Moscovici

Spain and Portugal were facing fines of up to 0.2% of GDP, which in Spain’s case would have meant €2.2 billion.

On Monday, the Commission put three options on the table: cancelling the infringement proceedings —the top choice for Commissioner Pierre Moscovici—, issuing the highest possible fine, or opting for a lower sanction of €1.1 billion, as proposed by EC Vice-President Valdis Dombrovskis. On Wednesday, Dombrovskis reduced that figure further to €500 million.

But in the end, the hardliners in the EC met with defeat.

Tough new targets

In exchange, however, Brussels is setting tough new targets for Spain and Portugal: 4.6% of GDP in 2016, 3.1% in 2017 and 2.2% in 2018.

The EC will keep a close eye on both countries’ public accounts through quarterly reports. It also wants an austere budget for 2017, with €5 billion worth of structural cuts.

Meanwhile, the decision to freeze structural funds for both countries will be left for a later date, after the Commission consults with the European Parliament. Spain stands to lose between €1.1 and €1.3 billion in these funds.

Moscovici on Wednesday listed some of the factors that led to the decision to cancel the sanctions against Spain. One of these is the fact that Spain’s largest businesses will have to pay part of their corporate taxes in advance, giving the state an added €6 billion or so to bulk up the 2017 budget.

The EC also took into account past sacrifices made by Spain to reduce its once-soaring deficit.

“The Commission admits that both countries have made significant structural efforts that we cannot ignore,” said Moscovici.

There were other factors that came into play, such as the fact that Spain has been under a caretaker government since December, and the European Union’s own credibility crisis in the wake of the Brexit vote.

“The decision to punish would not have been the best one to take at a time when people are questioning Europe,” admitted Moscovici. “It was not the ideal decision, but it was the most pertinent one.”

Several international experts had also warned against sanctions in recent days, alleging that they would be counter-productive in the present situation.

English version by Susana Urra.