Deficit Delinquency Schäuble Lets Spain, Portugal Off the Hook

The European Commission on Wednesday recommended no fines for the Iberian nations in violation of E.U. rules on budget deficits – thanks in large part to Germany’s finance minister, Handelsblatt has learned.
Vice President Valdis Dombrovskis (left) voted against leniency, but E.U. commissioner for economic and financial affairs Pierre Moscovici (right) said fines “would not have changed the past."

German Finance Minister Wolfgang Schäuble played a decisive role in the European Commission’s recommendation on Wednesday to not slap fines on Spain and Portugal for violating the European Union’s budget-deficit rules, Handelsblatt has learned.

Over the weekend, while at the G20 finance summit in Chengdu, China, Mr. Schäuble joined Spanish economics minister Luis de Guindos in blitzing E.U. commissioners with phone calls to make the case against imposing financial sanctions, according to high-ranking E.U. diplomats.

Their appeals worked. In the end, only four commissioners supported fines for the two Iberian nations at yesterday’s meeting of the European Union’s executive body.

“That was a surprise,” said one E.U. diplomat in Brussels. Just one week earlier, more than half the 28 E.U. commissioners had favored at least symbolic sanctions.

We have made two decisions today: to forgo financial sanctions and to withhold structural funds. Withholding structural funds will hit Spain and Portugal harder financially than would have been the case with sanctions. Jean-Claude Juncker, President, European Commission

Under eurozone rules, member states are required to keep their annual budget deficits under 3 percent of gross domestic product. Failure to abide by this requirement can result in sanctions equal to 0.2 percent of the violator’s GDP or the suspension of structural funds.

Spain faced a maximum of more than €2 billion ($2.2 billion) in fines, while Portugal faced almost €200 million.

Earlier in the month, eurozone finance ministers voted to open sanctions proceedings against Spain and Portugal for violating the deficit rules. At the time, Mr. Schäuble, a member of Chancellor Angela Merkel’s Christian Democratic Union, said the goal was not to sanction Portugal and Spain, “but to provide incentives for member states to do what is in their own interest.”

The E.U. Economic and Financial Affairs Council, composed of national economics and finance ministers, has 10 days to appeal the recommendation. But that scenario is considered unlikely because the largest members of the 28-nation bloc – Germany, France and Italy – are opposed to reversing the recommendation.

But Spain and Portugal may not escape completely unscathed.

Jean-Claude Juncker, president of the European Commission, told Handelsblatt that Spain and Portugal still could face the withdrawal of structural funds if they fail to make significant deficit reductions for 2017.

“We have made two decisions today: to forgo financial sanctions and to withhold structural funds,” Mr. Juncker told Handelsblatt. “Withholding structural funds will hit Spain and Portugal harder financially than would have been the case with sanctions.”

Precisely which structural funds are in jeopardy, however, has not yet been decided. The E.U. Commission plans to first discuss the matter with European Parliament’s economics committee in the fall. In the meantime, Spain and Portugal can avoid the worst by presenting solid budget proposals for 2017.

The Commission has detailed its expectations for both countries. Spain must reduce its budget deficit of 5.1 percent of GDP last year to 4.6 percent this year and 3.1 percent next year. Portugal must reduce its budget deficit to 2.5 percent this year – a level the country has never reached.

Hitting these targets would require more savings than both nations have planned.

This decision is a further step in the dismantling of the Stability and Growth Pact. Clemens Fuest, Head of German economic research institute Ifo

Mr. De Guindos for weeks had predicted there would be no fines against his country. In making its case, Madrid emphasized the considerable success of its efforts to reduce its budget deficit by more than half since 2009, when its deficit bloated to 11 percent.

Criticism of the Commission’s concession was widespread in Germany, despite the successful efforts Finance Minister Schäuble to make it happen.

Clemens Fuest, president of German economic research institute Ifo, attacked the Commission’s action, saying:  “This decision is a further step in the dismantling of the Stability and Growth Pact.”

The 1997 pact was launched to underpin the European single currency by discouraging financially disastrous fiscal policies and eliminating excessive budget deficits.

Lüder Gerken, head of the Freiburg-based Center for European Policy, called the accord “dead” in the wake of the Commission’s recommendation.

“With this decision it is clear that there will never again be fines or sanctions against deficit delinquents,” he said.

Disappointment also came from Germany’s ruling conservatives.

 

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“In the current situation it is essential that agreed E.U. rules are adhered to,” said Ralph Brinkhaus, deputy head of the Christian Democrats’ parliamentary group. The sanctions proceedings against Spain and Portugal should continue, Mr. Brinkhaus added.

He called for “monetary fines or at least a temporary freeze of structural funds resources” to remain on the table.

Günther Oettinger, Germany’s E.U. commissioner and a member of the Christian Social Union, the Christian Democrats’ Bavarian sister party, was one of four commissioners to vote against letting Spain and Portugal off the hook.

Commission Vice Presidents Jyrki Katainen of Finland and Valdis Dombrovskis of Latvia, and Sweden’s commissioner, Cecilia Malmström, also voted against leniency.

To date, no E.U. member state has ever faced financial sanctions. France and Germany have ignored the budget deficit rules in the past without facing any consequences.

In 2015, the European Commission gave France two additional years to bring its budget deficit below 3 percent. Asked why Paris was given leeway, Mr. Juncker simply said, “because it’s France.”

Pierre Moscovici, European Commissioner for economic and financial affairs, defended the recommendation.

 

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France’s former minister of finance and economics, Mr. Moscovici said that even symbolic fines “would not have changed the past” and would not have been understood by Spanish and Portuguese citizens.

 

Ruth Berschens is the Handelsblatt’s bureau chief in Brussels. Also contributing to this article were Sandra Louven, the paper’s Madrid correspondent; Jan Hildebrand, who leads Handelsblatt’s financial policy coverage from Berlin; and Dietmar Neuerer, a politics correspondent for Handelsblatt Online. To contact the author: [email protected]