World Economy

Spain, Portugal Win Clemency Over Deficits

Spain, Portugal Win Clemency Over DeficitsSpain, Portugal Win Clemency Over Deficits

European Union states agreed to cancel budget fines for Spain and Portugal and to set new deadlines for them to rein in their excess deficits, their representative body in Brussels said on Tuesday.

The widely anticipated decision confirms proposals made by the European Commission in July to waive the sanctions, despite both countries having last year breached the EU deficit limit of 3% of gross domestic product, Reuters reported.

The EU Council said in a statement that Spain would have two more years, until 2018, to bring the deficit below 3%. Portugal would have one more year, to 2016, to reduce its deficit to 2.5%.

The waivers, using a provision for exceptional circumstances, come against a backdrop of rising anti-EU and anti-austerity sentiment across Europe and follow a decision to grant France similar leniency when it missed deficit targets last year.

Both Madrid and Lisbon must take “effective action” by Oct 15 and submit a fiscal report by that date, the council said, confirming the recommendation made by the European Commission in July.

Jens Weidmann, the president of Germany’s Bundesbank, warned in an interview last week that “breaking the rules must have consequences at some point. In my view, the European Commission and the council (of EU member states) are not sufficiently consistent”.

But member states ultimately took a different view, mindful of the potential political fallout of any decision to impose fines on crisis-hit countries where anti-austerity sentiment is already running high.

Both Spain and Portugal have repeatedly missed their budget deficit targets since 2009. In other ways, however, they are seen as relative economic success stories: both have bounced back from an unusually harsh recession, unemployment is falling, and Spain in particular is experiencing strong economic growth.

Madrid argued repeatedly in recent weeks that it would be “paradoxical” to punish a country that has pushed through deep economic reforms and that saw its economy expand by 3.2% last year–almost twice as fast as the eurozone average.

Spain may find it difficult to adopt new measures by mid-October as it is struggling to form a government after two inconclusive national elections in December and June.

After the summer break, the commission will decide whether to freeze some EU funds to Spain and Portugal next year, a procedure within the remit of EU fiscal rules.

Member states that are part of the single currency area had until midnight on Monday to raise their objections to the proposal–but none did.