European Commission may sanction Spain and Portugal

Both countries failing to meet deficit targets

Spain and Portugal are facing the prospect of sanctions from the European Commission after failing to meet their deficit targets.

Both countries are hoping to avoid a fine of up to 0.2 percent of GDP and the freezing of EU funds, after the commission said they had “veered off track in the correction of their excessive deficits”. If EU finance ministers decide to back the sanction on Tuesday, the Commission will have three weeks in which to implement it.

Both countries used strict austerity measures earlier this decade to bring their finances under control, before easing off more recently.

Spain’s public deficit peaked at 11 percent of GDP in 2009 and was slashed to 5.1 percent by the end of 2015. However, that was nearly one percentage point off the target agreed with Brussels. In 2014, Spain also missed its objective and the Commission expects the country do so again this year.

“This leads to the conclusion that Spain has not taken effective action in response to the [European] council recommendation,” the commission said in a statement issued on Thursday.

Portugal, which saw a new leftist government in place last year, posted a 2015 deficit of 4.4 per cent, compared to a target of 3.0 per cent. The country’s response to EU recommendations, the commission statement read, “has been insufficient”.

Last week, the IMF cut its growth forecast for Portugal to 1.0 per cent.

The euro zone’s fourth-largest economy, Spain is recovering from its deepest crisis for decades. It is growing at a rate of 3.0 per cent and in June 98,000 people signed up to the social security system for work, the biggest jump in that month for a decade.

However, unemployment remains at around 20 per cent, critics say the jobs being created are of poor quality and public debt has ballooned to over 100 per cent of GDP.

The Spanish government has been bullish about the missed deficit targets, insisting a fine can be avoided.

“I have the guarantee of common sense, which says that Spain has made a big effort in reducing its public deficit to 5 percent [and] that it is the economy which is growing the most and which has made the most economic reforms,” Spain’s acting economy minister, Luis de Guindos, told Cadena Ser radio, after the Commission’s statement was issued.

“I’m convinced that the proceedings will end up without the imposition of a sanction.”

Spain has still not formed a new government after inconclusive elections in December were repeated last month.

Although other countries have received warnings in the past for failing to meet deficit targets, no nation has ever been sanctioned.