European Commissioner in Charge of Economic and Financial Affairs Pierre Moscovici chats with European Commission Vice-President in charge of the Euro and Social Dialogue Valdis Dombrovskis | EPA/Julien Warnand Commission declares Spain and Portugal violated budget rules Madrid and Lisbon could face huge fines for excessive deficits — if other EU governments agree.

The European Commission issued a "failed" grade to Portugal and Spain on Thursday for falling significantly short of EU-mandated budget standards.

Lisbon and Madrid failed to take “effective action” to reduce their budget deficits, the Commission concluded after an evaluation. They could now face fines of up to €2 billion, if EU member governments back the verdict unveiled by European Commissioner Pierre Moscovici and Vice President Valdis Dombrovskis at a news conference in Brussels.

EU finance ministers had told Portugal and Spain to bring their deficits down to 2.5 percent and 4.2 percent, respectively, by 2015. But they far below expectations last year, when Portugal recorded a deficit of 4.4 percent and Spain 5.1 percent.

“Spain and Portugal have veered off track,” said Dombrovskis. “The Commission is the guardian of the treaty and it has a duty [to defend the rules].”

EU financial ministers are expected to discuss the Commission’s findings on July 12. If they agree with the EU’s executive arm, Spain and Portugal will then have 10 days to convince the Commission to scrap or reduce the possible fines.

The Commission has the power to fine member countries up to 0.2 percent of their GDP if they breach a 3 percent budget deficit threshold. But it is far from certain that will happen.

In fact, fines could be zero, if the governments of Portugal and Spain persuade the Commission to take a moderate stance due to their current economic difficulties.

“We certainly need to take into account that we are dealing with the aftermath of a financial crisis,” said Dombrovskis. “Certainly there will be a possibility within this procedure for countries to put forward motivated requests to reduce potential sanctions or even bring them down to zero.”

The Commission has been criticized in the past for being too lenient in applying the rules. France and Germany, for example, have been let off the hook despite breaching the same budget standards. In particular, European Commission President Jean-Claude Juncker has been criticized for suggesting France should not face sanctions “because it is France.”

In May, the Commission opted to postpone the decision until July due to a political vacuum in Spain following an inconclusive election. Moscovici defended that position on Thursday.

“People are always pointing the finger at the Commission, but one of the things we do is respect democracy in member states,” Moscovici said. "What we did was right, we did it at the right time."

But that’s not enough, some parliamentarians say. German MEP Markus Ferber accused the Commission of habitually bending the rules “to their breaking point.”

“There must be no concessions to Madrid and Lisbon now,” Ferber said in a statement. "And I also expect the Commission to continue with this firm line. The next one in line has to be France.”