Article / 09 July 2016 at 10:00 GMT

Missed goals for Portugal and France (Spain too)

Managing Partner / Spotlight Group
United Kingdom
  • Portugal and Spain haven't met budget deficit targets in 8 years
  • Brussels to decide next week whether to levy fines worth 0.2% of GDP
  • If fines are imposed what action would be taken against France?
  • If the EU is less than perfect, the Eurozone is even worse...
poverty in Porto
 If structural funding is cut the poor will suffer most. Photo: iStock

By Stephen Pope

On Thursday, July 7 the European Union reported that Spain and Portugal both missed the deadline to bring their national finances in order.

Commission vice-president Valdis Dombrovskis said:

“...lately the two countries have veered off track in the correction of their excessive deficits and have not met their budgetary targets. ...”

Dombrovskis also suggested Brussels could freeze the structural funding for the two countries. These payments are targeted to reduce regional disparities in income, wealth and opportunities. Europe's poorer regions receive most of this financial support. 
The European Commission said yesterday that the two failed to take “effective action” to rein in their excessive deficits over the past two years. It is expected that Spain will fail to achieve its goals in 2016 as well.

In trying to show the nations a degree of accommodation, Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said:

“...I want to underline that both Spain and Portugal have emerged from a very deep economic crisis which had a heavy impact on the functioning of the real economy and also the wellbeing of their citizens ... many sacrifices were made during the crisis. Difficult steps were taken to rein in budget deficits, particularly in 2012 and 2013 and important and challenging reforms were adopted. ...”

Crunching the numbers

The Portuguese budget deficit came in at 4.4% of GDP in 2015, worse than an earlier 4.3% estimate from the government and above the 3.0% EU threshold for excessive deficits. The €2.2 billion state rescue for Banif bank negatively impacted the deficit by 1.4% bringing budget deficit to balance to €7.893bn. The latest figure is an improvement as in 2014 the country recorded a 7.2% deficit. 

In contrast, both local and regional government (€788 million) and social security funds (€1.089bn) recorded a surplus. 

Spain recorded a budget deficit equal to 5.1% of GDP in 2015 after averaging –3.81% of GDP from 1995 until 2015, reaching an all-time high of 2.20% percent of GDP in 2006 and a record low of -1.0% of GDP in 2009.
Portugal and Spain deficits
Source: Eurostat

Iberia faces a fine

The EU Commissioner from Germany, Guenther Oettinger has said that Brussels should fine the two Iberian nations for missing their 2015 deficit targets. In an interview with “Bild” he said:

"...Neither country met the budget commitments that they had both set themselves, ... I believe that if the EU Commission is to maintain its credibility regarding the budget rules, then we will have to impose sanctions on Spain and Portugal, ...If we draw up common rules, those rules have to be adhered to. It would be difficult to explain to people if they’re not. ..."

The two nations have yet to demonstrate to the European Commission how they are going to rein in their budgets. That certainly is not going to be an easy thing for Spain to do after June 26 delivered another inconclusive general election result where no party was able to form an outright or even a coalition majority.

Delicate decision

This is a tricky time in Europe as already the UK has voted to leave the bloc and Eurosceptic opinion is on the rise in many other countries. So it will be critical how the EU choses to act towards Portugal and Spain this month. In May of this year, Lisbon and Madrid were granted a stay of financial punishment as Brussels delayed a decision to slap fines on the rule breakers until July. Well, now that time has arrived.

With the debate over austerity versus state or even EU wide stimulus still a hot topic in economic and political circles it has to be accepted that the imposition of a financial penalty against an EU member state for excessive public spending would be unprecedented. 

 France misses goals too.....    Photo: iStock

Germany – no bully, just a level head

One can feel sorry for the German government as I agree with the view that if an economic bloc is to be seen as credible then over the course of an economic cycle the rules regarding the level of the budget deficit and the size of national debt with respect to GDP should be adhered to.
Germany insisted that the European Commission be given the power to monitor national budgets during the Eurozone debt crisis when overspending in members of the single currency such as Greece and Spain nearly destroyed the euro.

Whenever fiscal conditions are imposed on a debt-stricken country it is always the Germans that receive the main thrust of an attack. For over six years now I have asked why it is that the southern periphery nations all wish to be the euro club, but seem incapable of obeying the club rules. Take their debt out of the European Central Bank quantitative easing programme and one would soon bring the profligates to heel.

The decision day as to what to do will be next Tuesday, July 12, when EU commissioners meet to decide whether to impose penalties. These could be as high as 0.2% of GDP which based on 2015 GDP figures would be €362m for Portugal and €2.2bn for Spain.

The EU will have to be careful as to how it applies any sanction as action against Portugal and Spain will have to be extended to France. The Court of Auditors recently warned that France was likely to miss its deficit target and breach EU rules in 2017, though there was a chance it would at least manage to meet its target of 3.3% in 2016.

This is a serious issue as France has not had a deficit under 3.0% since 2007. For the record, Germany stands at a surplus of 0.7% of GDP and the Eurozone average in 2015 was a deficit of 2.1%.

Portugal piqued

Portugal’s government has expressed outright fury that it might be fined. Portuguese prime minister Antonio Costa sent a letter to the European Commission stressing that sanctioning Portugal would be unfair because its budget deficit is on a recovery path.

He also said it would be counterproductive because it would hurt efforts to get the economy back on its feet. In addition, he has warned that such a move could turn the Portuguese against the EU just three weeks after British voters chose to leave the bloc.

A fine, Costa added, would “...risk fostering an anti-European mood...” because years of austerity have already brought hardship for the Portuguese.

A shock for Spain

The EU has a dilemma as to how it can justify keeping Spain as a recipient of structural funds given the poor record on deficit control. On one hand the main EU creditor nations are demanding that beneficiaries demonstrate at the very least an intent to manage their national finances in a sensible manner.

However, with no coherent government in place any exclusion from regional aid could simply drive the electorate further toward the anti-austerity and Eurosceptic parties.

Market mood swings

What is clear is that in the short term the markets will not swallow another episode of fudge and compromise, a dark art at which the EU and Eurozone are the world champions. Markets have the ability to see when the European reaction is credible and when it is not.

Markets would sell weak Eurozone assets if there was an attempt to blur the lines and so duck responsibility again. That said, the markets have learned the Eurozone tricks; investors and speculators may be convinced that the euro is a confidence trick and that the EU and Eurozone are far from being ideal unions. 

However, another quick fix will offer markets an opportunity to snap up cheaper assets and enjoy the upside created by another round of EU and ECB palliative care.

– Edited by Clare MacCarthy


Stephen Pope is managing partner at Spotlight Ideas

vanita vanita
What about ftse and dax indices????
Stephen Pope Stephen Pope
Dear Vanita,

The technical aspect of the FTSE is bullish, encouraged by the weakness of sterling and the likelihood that the BOE will offer further monetary accommodation. This index is intact provided above 6070 and upside targets are 6635 , 6708, 7041.

DAX has a more muddled picture, with short-term and long-term technicals looking at selling the index. From the Friday close at 9629 a break under 9612 opens risk to 9576, 9314 and 9116,

If you opened the position after the BREXIT vote I can understand the thinking, but the serious weakness of GBP and potential BOE accommodation is giving a lift to UK equities.

My view is cut the losses. UK has no effective leadership until September...if the new PM were to call an election much depends n who labour have in charge...if Corbyn labour will be beaten badly and there will be a large Conservative majority so good for FTSE.

vanita vanita
Thanks very much Steve.
Take care.
BuySellBuySell BuySellBuySell
Good article Stephen and a hugely important issue me thinks. I am surprised that they have been allowed to break the rules for nearly eight years and are only now being possibly penalised. It seems like a strange issue in that the rules are apparently clear, the reason for the rules are very sound, so why do these governments not adhere to them? I suppose the answer is the obvious one in that when the chickens come home to roost, the current government won't be around to face the music. A huge problem in modern democracies it seems. Living beyond your means is a very bad idea. That rule applies for an individual a company or a country. Just ask the Greeks.
Krunil48 Krunil48
Great information: Governments like people do not adhere to rules when they think they can get away with not adhering to rules. How did Germany get to decide that sanctions be imposed on countries that do not adhere to EU budget rules? The more you read the more you cannot help come to the conclusion that Germany's economic might sets the agenda. Do what we say or we cut off your funding, that is the unspoken message.
Tepord Tepord
What happened to deleveraging ?
Tepord Tepord
What for what?


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