Spain and Portugal have not done enough to reduce their deficit, the European Commission has decided on Thursday (7 July) and they face sanctions that in the end may not be imposed.

The commission stated that "Portugal did not correct its excessive deficit by the deadline of 2015 and that Spain is unlikely to correct its excessive deficit by the 2016 deadline."

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Portugal missed the deadline to bring its deficit under 3 percent, while Spain is not doing enough to meet the target this year. (Photo: David Baxendale)

The institution's vice-president for the euro Valdis Dombrovskis told journalists that the decision was a "necessary step to give new deadlines" to the two countries to bring their deficit under the 3 percent of GDP required by the EU stability pact.

He added that the EU needed to apply the stability pact "in an intelligent manner".

If EU finance ministers confirm the commission's decision at their next meeting on 12 July, the commission will have to propose a fine and a partial suspension of structural funds for the two countries.

The commission's proposal on the amount of the fine would probably be announced on 27 July and ministers would rubber stamp it by written procedures within 10 days, sources said.

But the commission suggested that no sanctions could be applied.

"Zero sanctions is a possibility," finance commissioner Pierre Moscovici said, while Dombrovskis explained that "it will be possible for Spain and Portugal to put forward a motivated request to reduce potential sanctions or even bring them down to zero."

According to the rules, the fine can be up to 0.2 percent of the country's GDP and the suspension of commitments or payments from the structural funds up to 0.5 percent. But the commission can propose them to be equal to zero.

'No will to punish'

Amid debates among commissioners and member states over whether to strictly apply the budget rules, the two commissioners insisted that the decision would be mainly up to the finance ministers.

"The next step doesn't depend on us," Moscovici said, adding that the European Council, where member states sit, "is the master of the agenda".

Both commissioners also suggested that Spain and Portugal should be spared.

Dombrovskis noted that both countries "have come a long way" and that their efforts "should not be underestimated".

"There is no will to punish at all," Moscovici said, adding that the decision was about past fiscal results.

Spain's deficit was 5.1 percent of GDP in 2015, more than the 4.2-percent target set by the EU.

The deficit is expected to reach 3.9 percent of GDP in 2016, by comparison to the 3.6 percent required, and 3.1 percent in 2017, which is still above the 2.9 percent target.

'Fiscal policy was relaxed'

The commission notes that deficit reduction in Spain was helped by several factors like low interest rates and "a stronger-than-expected economic recovery" as well as the EU bailout of Spanish banks in 2012-2013 and "favourable labour market developments".

But it adds that "windfall gains, especially in 2015, were not used to accelerate the deficit reduction. Instead, fiscal policy was relaxed, in particular through the tax reform and dynamic expenditure growth."

In Portugal, the deficit was 4.4 percent of GDP in 2015.

The commission admits that Portugal missed the 3-percent target largely because of state support to the financial sector, but also adds that the Portuguese effort to improve the budget balance was "significantly below" what was required.

"Overall, since June 2014, the improvement of the headline deficit has been driven by the economic recovery and reduced interest expenditure in a low-interest rate environment," the commission says.

"Windfall gains were not used to accelerate the deficit reduction and the volume of structural consolidation measures was not sufficient to reach the targets."

'Common goal'

The commission's decision comes after several months of delays and debates.

Last autumn, Dombrovskis and Moscovici seemed to be at odds over the assessment of the Spanish budget, with Dombrovskis said to be advocating more leniency for the government of fellow center-right Mariano Rajoy.

In May, ahead of the Spanish June elections, the commission postponed its decision on the Spanish and Portuguese deficits and gave the countries one more year to bring them under 3 percent.

The one-year delay was criticised by finance ministers and the council's legal service. It is likely to be granted as part of the procedure now being launched.

If ministers back the procedure, the commission will maintain a "dialogue" with the Spanish and Portuguese authorities.

"The common goal is to ensure that finances are back on a sustainable track," Dombrovskis said.