BUDGET DEFICITS Spain, Portugal Face E.U. Sanctions

The euro zone has threatened to impose sanctions against Spain and Portugal for violating a limit on budget deficits. But critics accuse the currency union of a double standard after allowing France and Germany to get away with violating the rules.
German Finance Minister Wolfgang Schäuble says it was the right time to begin sanctions proceedings. Critics accuse the E.U. of double standards.

The euro-zone finance ministers have backed a decision by the European Union's executive body, the European Commission, to open sanction proceedings against Spain and Portugal for violating the bloc's rules on budget deficits.

If Brussels follows through, it would mark the first time that the E.U. executive has imposed sanctions on a member for running deficits. Germany has taken the lead in demanding Brussels to get tougher on its members.

The finance ministers made the decision to back sanctions proceedings with a "broad consensus," German Finance Minister Wolfgang Schäuble said. The goal is not to sanction Portugal and Spain, "but to provide incentives for member states to do what is in their own interest."

There was some debate about whether it was wise to start sanction proceedings so soon after Britain's vote to leave the European Union, Mr. Schäuble said, but it's important in the current situation to apply the E.U. rules.

It strengthens the existing impression that there are double standards in the euro zone: The weak are hanged and the strong go free. Sven Giegold, Green Party MEP

Under the European Union's Stability and Growth Pact, member states must keep their budget deficits at or below 3 percent of gross domestic product.

Spain and Portugal's failure to adhere to this rule could result in sanctions of up to 0.2 percent of their gross domestic products or the partial suspension of E.U. structural funds.

The two countries now have 10 days to present measures to avoid fines, said Jeroen Dijsselbloem, who leads the group of euro-zone member states. Otherwise, the European Commission will propose fines within 20 days.

No E.U. member state has ever faced sanctions for violating the Stability and Growth Pact. France and Germany have ignored the rules in the last decade without facing repercussions.

In 2015, the European Commission gave France two additional years to bring its budget deficit under three percent. When asked why Paris was given leeway, E.U. Commission President Jean-Claude Juncker simply said, "because it's France."

Sven Giegold, the Green Party's spokesman in the European Parliament for finance issues, said the move against Spain and Portugal could create more divisions in Europe.

"The decision against Spain and Portugal creates bad blood in Europe," Mr. Giegold said."It strengthens the existing impression that there are double standards in the euro zone: The weak are hanged and the strong go free."

But Austrian Finance Minister Hans Jörg Schelling believes that Spain and Portugal most likely won't face sanctions in the end.

"Sanctions are clearly set out in the treaty, up to 0.2 percent," Mr. Schelling said, according to Reuters. "But 'up to' also means less than or zero."

The European Commission has projected that Spain will run a budget deficit of 3.9 percent this year. Spain's economic minister, Luis de Guindos, expressed confidence that the country wouldn't face sanctions in the end.

Madrid plans to introduce a new minimum tax rate on companies that will generate €6 billion ($6.6 billion) in additional revenue, Mr. de Guindos said. Spain also plans to crack down harder on tax evasion, bringing in €1 billion. The country is also projected to pay €1.5 billion less in interest on its bonds.

Portugal is expected to bring its deficit under 3 percent, but miss a fiscal target agreed with its E.U. partners, according to Reuters. The country's finance minister, Mario Centeno, said sanctions are "not justified" since Portugal remains obligated to consolidate its budget.

In the aftermath of the financial and sovereign debt crises, Portugal received a bailout and Spain's banking sector was rescued. Both countries have exited their international bailout programs, but still suffer from high unemployment rates.

Till Hoppe is an editor with Handelsblatt in Düsseldorf and Sandra Louven is a correspondent with Handelsblatt in Madrid. To contact the authors: [email protected] and mailto:[email protected]