The European Union is preparing to impose sanctions on Spain and Portugal

12.07.2016

Today, Ecofin - the Economic and Financial Affairs Council – will consider the possibility of imposing sanctions on Spain and Portugal. Earlier, on 7th July, the European Commission made a similar recommendation. On July 11th, Ministers of Economy and Finance of the euro zone approved the initiative. The reason - the two countries have failed to bring the budget deficit to above the prescribed level.

Stability and Growth Pact

In this case, we are dealing with the first precedent of the possible imposition of sanctions against EU member states in the framework of the European Stability and Growth Pact mechanisms. This is a set of EU internal rules governing the size of the budget deficit and public debt in relation to GDP. The basis of the pact is the agreement of 1997 on the general regulation of tax and budget policy. In 1998 and 1999 two EU regulations came into force: the first so-called "Preventive arm" - Regulation on the strengthening of control over the state of public budgets, the second - "leverage effects" - the rules on the procedure to prevent excess government deficits.

The pact allows the imposition of sanctions against a Member State, if the budget annual deficit exceeds 3% of GDP and/or public debt is 60% of GDP or more.

In 2005 and 2010-11, the Pact was substantially amended. A mechanism of medium-term budgetary objectives was established and negotiated for countries that violate the criteria of the Stability and Growth Pact. These quantitative indicators are set individually for each country, the purpose of which is to gradually bring the economy to the general rule of 3% and 60%.

The fault of Spain and Portugal

Spain and Portugal have not fulfilled these medium-term budgetary objectives. In Spain, in 2015, the budget deficit amounted to 5.1% of GDP, while the EU has set the bar at 4.2%. Accordingly, it is expected that in 2016 the deficit will be 3.9% of GDP (the EU ceiling – 3.6%) and 3.1% in 2017 (objective of the EU – 2.9%).

Portugal pledged, in 2015, to reduce the budget deficit to 2.5% of GDP. As a result, the annual deficit amounted to 4.4% of GDP.

Possible sanctions

The sanctions under the Stability and Growth Pact mechanisms provide for a fine of up to 0.2% GDP and the suspension of payments from the EU Structural Funds to the amount of up to 0.5% of the country's GDP. The severity of the punishment is at the discretion of the European Commission. If there is an introduction of sanctions approved by the ECOFIN, on July 27th, the European Commission will announce their volumes, and then within 10 days of that decision it must be approved by Ecofin.

It is likely, also the possibility of introducing zero (formal) or minimum sanctions. This can be a kind of compromise between the demands of the rich countries of the north of Europe to tighten policy against the crisis of the European south and the EU fears that sanctions could trigger the growth of euroscepticism in Spain and Portugal. Earlier, the Spanish government made such a statement.

Ineffective Union

The imposition of sanctions against Spain and Portugal reflects several trends:

1. Unequal relations within the EU. Previously there were attempts to introduce sanctions for the same reason against Germany and France. France and Italy also grossly violated the rules of the Stability and Growth Pact. However, sanctions are introduced only against the poor and disfranchised Southern Europe.

2. Withdrawal of the sovereignty of states in the sphere of control over its economic policy in the EU. Contradictions between national sovereignty and the requirements of a single economic regulation in the EU, especially in the euro area.

3. Non-compliance of a number of EU countries with the economic criteria of the Eurozone and the EU as a whole, which cannot be solved within the existing EU mechanisms. At the same time the EU cannot even bring the country out of the euro zone (not to mention the exclusion from part of EU agreements or the exit from of the Union), as this may give an impetus to the destruction of the whole fragile structure of the European Union.

4. Lack of flexible mechanisms within EU regulation a single economic policy.

5. Growth of Euroscepticism in both rich and poor countries of the EU. The rich countries of the European north are unhappy that they supposedly have to pull the poor South out of the economic abyss. The poor South is unhappy with the austerity measures that Brussels imposes. In general, it is an indicator of the economic inefficiency of EU policies in general.