Spain and Portugal avoid EU sanctions — for now

September 12, 2016

Protest against austerity. Lisbon, 2013.

A month ago, on August 8, it became official — the high school governors agreed that the headmaster had acted correctly in not caning the two miscreant schoolboys.

The schoolboys are Spain and Portugal; their misdemeanour was to keep missing their public sector deficit reduction targets set under the European Union’s “excessive deficit procedure”. The headmaster is the European Commission, headed by President Jean-Claude Juncker, and the school governors are the finance and economy ministers of the EU’s 27 member states — who meet as the Ecofin committee.

Any one of the member states could have objected to the European Commission’s July 27 provisional decision apparently supporting clemency for the two repeat offenders. But none did.

Their acceptance was in line with the fact that, at a fraught three-hour June 27 meeting to decide on penalties, only four of the EU’s 27 commissioners (ministers) proposed an exemplary caning for Portugal and Spain.

In this way, just over a year after their sadistic thrashing of the Syriza-led Greek government, the EU institutions decided to allow the two Iberian countries to walk away with only a warning that they were under “strict oversight”.

The delinquent states were also put on a good behaviour bond. They will have to meet harsh new deficit reduction deadlines, including specific final targets less than the present EU benchmark of 3% of GDP. Meeting them will require cuts and/or tax hikes.

Whether the two states get the European structural and investment funds already due to them is also still undecided. A “structured dialogue” is to take place between the European Commission and the European parliament. Spain stands to lose €1.2 billion and Portugal €500 million if these funds are withheld.

Elastic targets never met

How and why the EU powers-that-be decided on this response — including the role played by “arch-hawk” German finance minister Wolfgang Schaueble — throws a lot of light on how politics has been shifting in Europe.

There was no doubt that both countries were guilty as charged. By 2015, they were supposed to have cut their public sector deficits to the 3% of GDP stipulated in the EU Stability and Growth Pact. Spain only managed 5.1% and Portugal 4.4%.

The two countries had been missing progressively softer targets ever since 2009, despite Spain having had deadlines eased three times and Portugal twice.

With the August 8 decision, the farce of deadline-shifting continued. Spain is now to cut its budget shortfall to 4.6% this year, 3.1% next year and 2.2% in 2018.

Yet under the original targets set in March 2009, the Commission required Spain to “ensure a government deficit below 3% of GDP in 2012 in a credible and sustainable manner”. If Spain finally gets its government budget deficit under this figure before 2018, it will be more than five years behind schedule.

Despite these breaches, the European Commission background documents produced to guide its July 27 decision were receptive to the Spanish and Portuguese cases for clemency.

Javier Santacruz wrote in Spanish magazine Ctxt on August 10: “It is certainly strange and paradoxical for Brussels to ‘buy’, point by point and without so much as a critical comment, the arguments of the [Spanish] economy ministry.

“We are dealing with a decision whose character is political more than technical: if we have regard for the prevailing legal framework … Spain should be penalised with a fine equal to 0.2% of 2015 GDP [€2.1 billion] because it hasn’t even respected the postponed targets of deficit reduction that the government itself promised to meet.”

The only grounds for waiving such a fine are “an extraordinary incident outside the control of a member state that seriously affects the financial situation of public administrations” or a prolonged recession that drags a national economy’s output well below its potential.

Greece certainly fulfilled this last condition, with GDP now nearly 30% below its 2009 level. But despite the recent recession, Spain (still growing quite strongly) and Portugal (growing weakly) did not.

The politics of U-turn

The Brussels functionaries weren’t troubled by such inconsistencies. In effect, they endorsed the case for leniency made by the Spanish “econocrats”, who boasted of their country’s status as a “special case” and “deep-going reforms”.

Of these “reforms”, however, only two have had any measurable impact on the Spanish economy: two rounds of labour market deregulation that have slashed wages and working conditions and a €51 billion finance system bailout at taxpayer expense.

Portugal’s arguments were simpler — it would effectively reach the 3% target this year because the measures to achieve it were already in place. In any case, it said, Portugal’s budgetary misdemeanours were not the fault of the Socialist Party government of Antonio Costa, in office since only November.

So why the EU’s U-turn? This question is essentially about the German government: why did the Merkel administration — which has most influence on EU policy and never stopped insisting that “rules are rules” when declaring war on Greece last year — have a sudden attack of flexibility?

In the first week of July, Schaueble was still insisting that “the rules must be respected” while Guenther Oettinger, the German European commissioner for the digital economy, was telling gutter rag Bild that “if the Commission wants to maintain its credibility, we have to adopt sanctions now. Anything else would be inexplicable.”

Yet just a fortnight later, Schaueble was pressing Oettinger to soften his position. He rang around the EU commissioners and his member state counterparts to say, according to “EU sources” quoted by Spanish daily El Pais, that sanctions were not needed as it was “enough” that Ecofin had ruled that Spain and Portugal did not take effective measures and would remain under strict oversight.

Some European media coverage ascribed the German volte-face to political debts of the German government and of the European Commission to the conservative Spanish People’s Party government, as well as clever tactical footwork by Juncker.

These were at best secondary influences that, even if absent, would not have changed the decision. The basic cause of the U-turn was that Schaueble became convinced of the need to organise the retreat of the other “rules-are-rules” hardliners in response to a panicky offensive by EU commissioners and finance ministers from the Mediterranean member states and Portugal.

Conservative and social-democrat officials alike from this EU “periphery” were quaking at the prospect of popular reaction to EU sanctions — not only in Portugal and Spain, but in France, Italy and Greece as well.

Nightmare scenarios

The sanctions being considered would have been the first ever imposed on any EU member state, and this when both Germany and France have avoided sanctions for their own “excessive” deficits in the past.

They would have been imposed on countries that have suffered most from the economic crisis. In the Portuguese case, they would have been imposed on the EU’s own “model student” in applying austerity policies.

The sanctions would have shattered the painstaking efforts of the Spanish establishment to impose a pro-austerity government after two rounds of general elections have left the country with only a caretaker administration.

In Portugal, they would also have strengthened the position of the Left Bloc, which made it clear at its July convention that it would demand the Costa government call a referendum on whether any EU sanctions should be paid.

In Italy, sanctions would have strengthened the position of the Eurosceptic Five Stars movement against increasingly embattled social democratic Prime Minister Matteo Renzi. In France, they would have further boosted the far-right National Front, already leading in polling for next year’s presidential elections.

Little wonder, then, that the most energetic lobbyers for leniency were the Portuguese, Spanish and Greek commissioners Carlos Moedas, Miguel Arias Cañete and Dimitris Avramopoulos (all conservatives) and Italian social-democrat and EU High Representative Federica Mogherini.

These officials convinced the most important of their northern European counterparts — Schaueble and Dutch first vice-president Frans Timmermans — that persisting with sanctions would set off a north-south crisis within the EU institutions.

In this atmosphere, with Brexit still fresh in the memory, even the strongest supporters of “rules are rules” — led by Latvian commission vice-president Valdis Dombrovskis — thought the better of proposing that Spain and Portugal pay the full 0.2% of GDP fine envisaged in the EU regulations.

But even Dombrovskis’s alternative — halving the fine to 0.1% of GDP — had only three other supporters after Schaueble decided on a tactical retreat.

French social-democrat EU economics commissioner Pierre Moscovici was candid about the reasons for the commission’s decision: “Even a symbolic fine would not have been understood by people … Europe doesn’t need another crisis to deal with right now.

“Amid the migrant crisis, the terrorist threat, the Brexit vote and rising populism, it doesn´t need a conflict over fiscal rules as well.”

The August 8 decision was a win against austerity, but those who helped bring it about are under no illusions about the struggles that lie ahead. As Left Bloc MP Isabel Pires wrote on Portuguese web site The Contradiction on July 28: “For Portugal at the moment, the sanctions process seems to have ended, but for the Commission it has not.

“Over the coming months the attempts to punish us by other means will be many and creative. If for now this setback in the implementation of sanctions can be considered a defeat for the Commission, the battle is still far from over.”

[Dick Nichols is Green Left Weekly’s European correspondent, based in Barcelona. A more detailed version of this article will soon appear on the website of Links International Journal of Socialist Renewal.]

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