In Unprecedented Decision, Europe Will Sanction Spain, Portugal Over Deficits While Ignoring France, Italy

Confirming yet again that just like in the US, "some are more equal than others", moments ago the European Commission announced that it would seek sanctions for Spain and Portugal for breaching limits on budget deficits in an unprecedented step to enforce rules designed to prevent another debt crisis. “The two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets,” Valdis Dombrovskis, a vice-president of the European Commission, said in e-mailed statement. “Reducing the high deficit and debt levels is a pre-condition for sustainable economic growth in both countries."

Spain’s deficit was equivalent to 5.1% of its gross domestic product last year, compared with a target of 4.2%. Portugal’s shortfall ended 2015 at 4.4 percent, higher than the 3 percent threshold for countries to fall under corrective oversight known as Excessive Deficit Procedure. The average budget shortfall for the 28-country bloc was 2.4 percent in 2015, according to the EU’s statistics agency. When Spain entered the EU’s Excessive Deficit Procedure in 2009 it was given until the end of 2012 to bring its shortfall below the 3% limit. The bloc already gave extensions to that deadline in December 2009, 2012 and 2013. Portugal entered the process to adjust excessive deficits in 2009.

As Bloomberg reports, EU finance ministers, who meet in Brussels next week, must now decide whether to endorse the ruling. Still, even if the recommendation is approved, it is likely that the ultimate result will be at best symbolic: the commission would have 20 days to propose fines and a suspension of some European regional funds. The fines could be reduced or canceled because of “exceptional economic circumstances” or a reasoned request, according to the statement.

However, no matter where the process ends, the symbolism will not be lost on Spanish and Portuguese citizens, and punishing the Iberian countries will be a deeply contentious and divisive issue. That’s because while other countries including France and Italy have all received warnings in recent years after missing targets on deficit or debt, no country has so far been sanctioned. Until now.

The ruling comes at a very awkward time, just as the EU is weighing the need to enforce its budget rules against a backdrop of wider calls to rally support for the bloc following the U.K.’s decision last month to leave. Spain’s Acting Economy Minister Luis de Guindos has been adamant that sanctions against his country would be unreasonable as the government is working to fix its economy after the financial crisis. 

“These rules contain some flexibility, but in this case the flexibility has been used up,” Jeroen Dijsselbloem, the Dutch Finance Minister who leads the group of his euro-area counterparts, said in The Hague earlier Thursday. “When I look at the numbers I really have to conclude that Spain and Portugal did too little.”

What happens next? EU finance ministers have a meeting scheduled for July 12, in which they may discuss whether to enable the commission to go ahead with the penalty procedure. The commission has more powers to push for sanctions against member states including fining countries that persistently breach their commitments by as much as 0.2 percent of their gross domestic product. It also can send inspectors to scrutinize national accounts and suspend some EU funds.

Complicating matters is Italy which is pressing Europe to allow it to bailout its banks and overrule bail-in regulations to the detriment of established European process and over the objections of both Merkel and Schauble.

Whatever the final outcome, it appears that more than anything, Brexit has exposed the deep, and latent, fissures that have always been present within the European Union and Eurozone - where some countries get preferential treatment to others - which alas have always been present, and which tend emerge to the surface any time there is a crisis, either real of manufactured.