July 28, 2016
The European Commission yesterday decided against fining Spain and Portugal for their sustained excessive deficits, contrary to expectations that the hawks in the Commission would prevail this time around. However, the zero fine is compensated by tighter deficit targets than expected. And finally, a formal decision on suspending structural funds has not been taken, pending consultation with the European Parliament, but Valdis Dombrovskis said the Commission's proposal will be "rigorous" and the countries will have to make the necessary fiscal adjustments before the suspension can be lifted. And, if Spain does not meet the new targets there will be an automatic fine of 0.5% of GDP.
Dombrovskis justified the decision on the difficult social situation in both countries, where unemployment remains very high. Pierre Moscovici also said the public in Spain and Portugal would not have understood even a symbolic fine, and the EU can ill afford that at a time when citizens are doubting Europe. The Council has to approve the Commission's decision, and Moscovici also said finance ministers would not have supported a fine. Handelsblatt writes that Wolfgang Schäuble was decisive in changing the vote making a series of phone calls to commissioners. According to the paper Schäuble's intention is ostensibly to strengthen Mariano Rajoy, who is presently trying to gather support behind him as prime minister. The paper quotes Clement Fuest of IFO and Volker Wissing of the FDP bemoaning that Schäuble is undermining the stability and growth pact, and that the monetary union is no longer a stability union.
The Commission's proposed fiscal path for Spain and Portugal is as follows:
Spain must be below the 3% deficit threshold by 2018. The nominal deficit targets will be 4.6% of GDP in 2016, 3.1% in 2017 and 2.2% in 2018. The Commission estimates these are consistent with a structural adjustment of +0.4% in 2016, and -0.5% in each of 2017 and 2018. Spain is also required to use any windfall gains to reduce the deficit, and to take further measures if there is a risk that the budget trajectory will deviate.
Portugal must be below the 3% deficit threshold this year. The nominal deficit should be 2.5% of GDP not counting bank support measures. The target is consistent with a Commission estimate of an unchanged structural budget balance, but Portugal should also be ready to implement further measures if there is a risk of deviations.
The Portuguese government maintains that the Commission does not ask for additional measures, just the implementation of the budget with a consolidation effort of 0.25% of GDP, around €465m. In its recommendations, though, the Commission suggested to increase the VAT for the lower rate (6%), something the Socialists might find difficult to agree with its left allies: A rise from 6% to 13% will be out of the question, though an increase from 6% to 7% could well be discussed, according to Jornal de Negocios. And even if the Commission lets Portugal off the hook for this year, it increases the pressure on Portugal for 2017, confirming Mario Centeno’s pledge to reduce the structural deficit by 0.6% of GDP.
The two governments have until September 12 to take a position about the new fiscal path.
We also have stories on the leak of some stress test results; on the appointment of Michel Barnier as the Commission's Brexit negotiator; on Tsipras' return to Syriza's social pledges; and on Orban's Europe.