World Economy

Portugal Rejects Austerity

Portugal Rejects AusterityPortugal Rejects Austerity

Portugal has rejected suggestions by Brussels that additional budgetary corrective measures, better known as austerity, in southern Europe, would most likely see the country avoid sanctions imposed by the EU this week, translating into monetary losses.

Portugal, along with Spain, was this week charged with not making enough of an effort to cut its budget deficit and bring it in line with the 3% threshold imposed by the EU, PortugalNews reported.

Having reduced its deficit from double figures at the beginning of the decade and cut spending substantially in the ensuing years, this has not been enough for the Eurogroup of EU finance ministers nor for the European Commission.

Portugal had been warned in 2013 that it would face sanctions in 2016 if it did not meet its targets.

Lisbon managed to cut the deficit of 7.2% of GDP in the following year down to 4.4% in 2015.

The country was on the verge of declaring a deficit of 3.2% before the collapse of Banif bank last December sucked more cash out of the country’s depleted coffers. Without the bank’s failure, Lisbon would have come within a couple of decimal points of complying with its obligations.

But the extenuating Banif-factor has been dismissed by Brussels, which said Portugal would nonetheless have been non-compliant and should therefore, in the words of German Finance Minister Wolfgang Scauble, receive extra “motivation” in the way of sanctions to ensure it keeps its books in check in the future.

This suggestion has so far been rejected by Prime Minister Antonio Costa. He reasoned that latest forecasts point to Portugal’s deficit expected to dip below the 3% barrier, with the Organization for Economic Development and Cooperation predicting last month that Portugal would end the year with a deficit of 2.9%.

The prime minister is, this week, arguing that any additional austerity would have no effect on the results of 2015, whereas the measures currently in place point to Portugal meeting its targets and that its anti-austerity policies are actually working to improve the health of the country’s accounts.

Should Portugal argue that nothing more needs to be done, it could face a fine of around €360 million ($400 million), which equates to 0.2% of the GDP.

A similar fine for Spain would see its accounts depleted by more than €2 billion, an undesirable situation for one of Europe’s biggest economies and the continent as a whole, and one which might play in Portugal’s favor.

Portugal now has ten days in which to present its argument against fiscal sanctions, with the EU’s final decision set to be made on August 1.