Source: Council of the European Union – Press Release/Statement:
Headline: Excessive deficit procedure: Council finds that Portugal and Spain have not taken effective action
On 12 July 2016, the Council found that Portugal and Spain had not taken effective action in response to its recommendations on measures to correct their excessive deficits.
It confirmed that they will not have reduced their deficits below 3% of GDP, the EU’s reference value for government deficits, by the recommended deadline. And in both cases, it found the fiscal effort to fall significantly short of what was recommended.
The Council’s decisions will trigger sanctions under the excessive deficit procedure. They are based on article 126(8) of the Treaty on the Functioning of the European Union.
The Commission has 20 days to recommend further Council decisions imposing fines. Those fines should amount to 0.2% of GDP, though Portugal and Spain can submit reasoned requests within 10 days for a reduction of the fines. The Council will have 10 days to approve the fines.
“I am sure that we will have a smart, intelligent result at the end”, said Peter Kažimír, minister for finance of Slovakia and president of the Council.
In April 2011 however, after several months of
market pressure on its sovereign bonds, Portugal requested assistance from
international lenders. It obtained a €78 billion package of loans from the
EU, the euro area and the IMF. In October 2012, the Council extended the
deadline for correcting Portugal’s deficit by one year to 2014, in the light of
the recession that the country faced.
Economic prospects deteriorated
further, and Portugal’s general government deficit reached 6.4% of GDP in 2012.
In June 2013, the Council extended the deadline for correcting the
deficit by another year, to 2015. It set headline deficit targets of 5.5% of GDP
in 2013, 4.0% of GDP in 2014 and 2.5% of GDP in 2015, consistent with 0.6%, 1.4%
and 0.5% of GDP improvements in the structural balance respectively.
Portugal exited its economic adjustment programme in June 2014.
However its general government deficit came out at 4.4% of GDP in 2015, and
the deadline was missed for correcting the deficit. The overshoot was
largely due to a financial sector support measure (resolution of Banif), though
the deficit net of one-off measures would in any case have been above 3% of GDP.
The cumulative improvement in Portugal’s structural balance in the 2013‑15
period is estimated by the Commission at 1.1% of GDP, significantly below
the 2.5% recommended by the Council. When adjusted in the light of revised
potential output growth and revenue windfalls or shortfalls, it is even slightly
Overall, since June 2014 the improvement in Portugal’s
headline deficit has been driven by economic recovery and reduced
interest expenditure in a low-interest-rate environment. The country’s general
government gross debt has broadly stabilised. It amounted to 129.2% of GDP at
the end of 2013, 130.2% of GDP in 2014 and 129.0% of GDP in 2015, according to
the Commission’s spring 2016 economic forecast.
The Council concluded
that Portugal ‘s response to its June 2013 recommendation has been insufficient. Portugal didn’t correct its deficit by 2015 as required,
and its fiscal effort falls significantly short of what was recommended by the
Spain has been subject to an excessive deficit
procedure since April 2009, when the Council issued a recommendation calling for
its deficit to be corrected by 2012.
In December 2009 however, the
Council extended the deadline to 2013. The Commission forecast that Spain’s 2009
deficit would reach 11,2 % of GDP, five percentage points more than its previous
In July 2012, the Council extended the deadline for a further
year to 2014 on account of renewed adverse economic circumstances. The
Commission projected that Spain’s general government deficit would reach 6.3% of
GDP in 2012, compared to the 5.3% previously expected.
Also in July
2012, the euro area member states agreed to provide up to €100 billion of loans
for the recapitalisation of Spain’s financial services
In June 2013, the Council found that Spain fulfilled the
conditions for extending the deadline for correcting its deficit by a further
two years, setting a new deadline of 2016. It set headline deficit targets
of 6.5% of GDP for 2013, 5.8% of GDP for 2014, 4.2% of GDP for 2015 and 2.8% of
GDP for 2016, consistent with 1.1%, 0.8%, 0.8% and 1.2% of GDP improvements in
the structural balance respectively.
Spain exited the financial
assistance programme for the recapitalisation of its financial institutions in
January 2014. It had used close to €38.9 billion for bank recapitalisation, plus
around €2.5 billion for capitalising the country’s asset management
Spain’s general government deficit amounted to 5.9% of GDP in
2014 and 5.1% of GDP in 2015. above the intermediate targets set by the Council.
A relaxation of fiscal policy in 2015 had a large impact on the fiscal
outcome. The cumulative improvement in the structural balance over the 2013‑15
period amounted to 0.6% of GDP, significantly below the 2.7% recommended
by the Council. When adjusted in the light of revised potential output growth
and revenue windfalls or shortfalls, it is even lower.
Over the 2013‑15
period, low or even negative inflation made achievement of the fiscal targets
more difficult, but this was largely offset by higher-than-expected real GDP
growth. A low interest rate environment has also helped Spain reduce its
deficit. The Commission’s 2016 spring economic forecast projects a general
government deficit of 3.9% of GDP in 2016 and 3.1% of GDP in 2017. Spain is
therefore not set to correct its deficit in 2016 as required. The
debt-to-GDP ratio declined from 99.3% in 2014 to 99.2% in 2015, thanks to sales
of financial assets. According to the Commission’s 2016 spring forecast, the
debt ratio is expected to rise to 100.3% in 2016 and decline thereafter.
The Council concluded that Spain ‘s response to its June 2013 recommendation
has been insufficient. Spain didn’t reach the intermediate target set for
its headline deficit in 2015 and is not forecast to correct its deficit by 2016
as required. Its fiscal effort falls significantly short of what was recommended
by the Council, and it even relaxed its fiscal stance in 2015.