BERLIN — The European Commission, faced with a thorny call over whether to crack down on fiscal miscreants Portugal and Spain, relied on its tried-and-true remedy for tricky situations: It delayed the decision.
The Commission on Wednesday granted Spain and Portugal an extra year to bring their budgets in line with the eurozone’s fiscal rules, a move that will bolster critics who maintain they were designed to be broken.
Both countries’ books have fallen badly out of whack, with Spain’s budget deficit at 5.1 percent and Portugal’s at 4.4 percent. Eurozone regulations compel members to record deficits of no more than 3 percent of gross domestic product.
Yet reining in public spending in a challenging economic environment is easier said than done. That’s particularly true in countries such as Portugal and Spain, which are still reeling from the effects of the financial crisis and chronic unemployment.
The Commission has the power to impose fines of up to 0.2 percent of a country’s economic output on laggards, but has never done so. Instead, it typically issues the Eurocratic equivalent of a rap on the knuckles.
Over the years, a number of countries, including France and Germany, have violated the rules, enshrined in the grand sounding “Stability and Growth Pact.” The only punishment ever meted out was the initiation of proceedings against Portugal and Greece more than a decade ago — exercises that went nowhere.
Though the Commission vowed to take a harder line in the wake of the debt crisis and the loss of investor confidence in the integrity of some countries’ budget data, Wednesday’s decision suggests otherwise.
With the U.K.’s referendum less than a month away and confidence in the European Union running low across the Continent, the Commission was clearly keen not to unleash another political crisis.
Economy commissioner Pierre Moscovici, France’s former Socialist finance minister, explained that it simply wasn’t the right time to punish Spain and Portugal, given their recent efforts to overhaul their economies.
“We propose that each country receive one extra year, and one extra year only,” he said at a news conference in Brussels. The deadlines to reach EU-mandated targets are 2016 for Portugal and 2017 for Spain.
Political calculation drove the decision as much as charity. Spain is in a state of political paralysis after recent elections there failed to produce a clear victor. New elections are set for late June.
If the Commission had recommended sanctions in the middle of the campaign, the Spanish would likely have interpreted the move as an intervention by Brussels in the country’s electoral process. The big loser would have been Mariano Rajoy, the conservative Spanish prime minister now leading the country on an interim basis until the election.
Berlin would like to see Rajoy, an ally of Angela Merkel’s, stay in place rather than face someone from Spain’s potent left-wing movement. Indeed, Merkel and her finance minister, Wolfgang Schäuble, have long held up Spain and Portugal as examples of countries that have gotten it right by adopting the austerity remedies Berlin has championed.
Alas, while the pair have shown tangible signs of progress since the height of the crisis, their fiscal performance has recently flagged.
Spain’s debt is on course to exceed 100 percent of its economic output this year for the first time since 1909. Eurozone rules require countries to keep the debt burden below 60 percent.
If either country falls further off course, Germany would have a difficult time continuing to insist that belt-tightening is the only way to revive the eurozone. Many economists have warned for years that the strategy risked trapping countries in a cycle of stagnation.
The Commission said it would reassess the situation in Spain after the June 26 election.
The reaction to the Commission’s move was as predictable as its non-decision.
“It’s unacceptable that the Commission gave in to lobbying from Madrid and Lisbon and extended the deadlines again,” said Markus Ferber, an MEP from Germany’s Christian Social Union, the Bavarian sister party of Merkel’s Christian Democrats. “I don’t accept the argument that there’s an election campaign ongoing in Spain. With that logic, there would always be reasons not to fine countries.”
Nonetheless, there are plenty of sound economic arguments for not imposing sanctions on the two countries. Given the delicate economic environment, such a move would risk worsening their growth picture. For that very reason, the Commission has broad discretion over when and whether to act.
“At the current juncture, with most eurozone countries desperately trying to revive growth and tackle unemployment, today’s decision was in our view the right decision,” said Carsten Brzeski, an economist with ING in a note to clients. “It is not always a bad thing if barking dogs don’t bite.”
Florian Eder contributed to this report.
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