Commission President Jean-Claude Juncker warned of the "political consequences" of imposing sanctions on Spain and Portugal

Spain and Portugal will get only one extra year to fulfil EU fiscal rules on their deficits, once sanctions against both countries are adopted, while Italy will escape an infringement procedure, EurActiv.com has learned.

The college of commissioners is expected to endorse on Wednesday (18 May) a recommendation that would lead to imposing sanctions on Madrid and Lisbon for breaching the Stability and Growth Pact for the first time in the EU history, EU sources told this website.

As EurActiv reported on 11 May, the Commission considers that Madrid and Lisbon have failed to take “effective action” to meet their deficit targets this year. Accordingly, it will  adopt a decision under article 126.8 of the pact, which would ultimately trigger the imposition of a fine of up to 0.2% of GDP.

Commission to recommend sanctions against Spain and Portugal

The European Commission will launch a sanctions procedure against Spain and Portugal or the first time, as the college concluded on Tuesday (10 May) that the two countries have not made “sufficient effort” to cut their deficits.

In parallel, the Commission will adopt a recommendation, under article 126.9 with a series of specific measures  that both countries will have to take in the next three months, and a new set of nominal and structural deficit targets for this year and the next, the  EU sources explained.

The executive has finally decided to grant only one extra year to the Iberian economies to cut their deficits below the mandatory 3% of GDP, as the vice-president for the euro, Valdis Dombrovskis, argued for.

Commissioner for Economic Affairs, Pierre Moscovici, initially defended two more years. He was “more sceptical” about the possibilities of Spain to succeed in reducing the deficit from 5.1% registered in 2015 to 3% in 2017, given the political deadlock brought by the inconclusive elections held on 20 December.

Difficult context

The Commission is “aware” of the difficult context Spain faces to adopt any significant measure in the next months, given that new elections will take place on 26 June.

Prime Minister Mariano Rajoy wrote to Commission President, Jean-Claude Juncker, in early May asking to postpone the decision, to avoid any interference in the campaign.

EU officials explained that one of the options under consideration on the eve of the college meeting on 18 May was to postpone the decision until after the Spaniards go to the ballot box.

The sources consulted admitted that Juncker is “very sensitive” about the reaction that a fine could cause in two bail-out countries. Polls predict that the coalition of anti-austerity parties led by Podemos is expected to come second in the Spanish elections.

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During the orientation debate held on 11 May, the president told the college to be aware of the “political consequences” of imposing sanctions for the first time, given the numerous crises that the EU is facing.

Council’s okay

Before taking a decision on the fine, the Council must endorse the Commission’s recommendation.

EU officials expect that the EU Finance ministers will endorse the executive’s proposal either on 17 June or in July, as the topic is not included in the Ecofin Council to take place on 25 May.

Once the Council backs the Commission’s verdict on the lack of effective action, and the new set of measures and calendar to fulfil the fiscal rules, the executive will have 20 days to propose a fine to the ministers.

After that, Spain and Portugal will have ten additional days to give their reasons to avoid the fine.

The amount could be up to 0.2% of GDP, although it could be reduced or even close to zero, as Juncker himself wants – according to the German press.

Once the final figure is fixed, the Council could adopt it, reject it by reversed qualified majority, or modify it by qualified majority.

Flexibility for some

The strict application of the rules shown with the two bail-out countries contrasts with the softer approach the Commission is ready to play with Italy.

The institution is expected to grant its ‘pardon’ to the Italian government despite its deviation from the medium term objective to balance their public accounts to reduce the high level of public debt (around 132% of GDP). Therefore, the executive will not launch an infringement procedure against the country at this stage.

EU officials explained that the clarifications and new adjustments promised by Prime Minister Matteo Renzi were sufficient to grant additional flexibility within the existing EU rules to the third largest eurozone economy.

It will not be the first time Italy receives extra leeway to digest its debt, the second biggest after Greece. But Rome argued that the additional costs caused by the refugee crisis negatively affected the adjustment path since last year.

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Background

In 2013, Spain received three extra years to cut its deficit below the mandatory 3% of GDP of the pact.

Despite the fact that this was the third time Madrid had been granted leeway since 2009, the deficit reached 5.1% of GDP in 2015, higher than previously announced.

The European Commission's latest forecast predicts that the Spanish deficit will be 3.9% of GDP this year and 3.1% in 2017.

In April, the executive and the ECB concluded that the needed progress on fiscal consolidation in Spain "has come to a halt, with part of the structural adjustment implemented in earlier years being reversed".

Following the elections on 4 October, a three-party coalition led by the Socialist Party came to power in Portugal. The new government failed to submit its draft budget for 2016 by 15 October, as the EU’s fiscal rules said, and sent the draft proposal only on 22 January 2016.

After assessing the first draft, the Commission concluded that the budget was “in clear breach of the Stability and Growth Pact”, and requested more measures.

Portugal has been in the corrective arm of the Stability and Growth Pact since December 2009 and was asked to bring the deficit to below 3% of GDP by 2015. For 2016, the Council recommended that Portugal should make a structural effort of 0.6% of GDP. According to Portugal's national budget and the Commission's winter forecast, the general government deficit is expected to have been 4.2% in 2015.