The European Commission began formal disciplinary procedures against Spain and Portugal on Thursday for their excessive deficits in 2014 and 2015, which may lead to fines for the two countries before the end of July.
Both had deficits greater than the European Union's limit of 3 percent of gross domestic product in the past two years and failed to correct the deficits quickly enough, the Commission said.
The two countries now risk fines and the suspension of EU funds if they cannot show the rules were breached because of "exceptional economic circumstances". Fines up to 0.2 percent of GDP may be imposed if the excessive deficits aren't reduced, although sanctions so far have never been applied.
The Council of EU finance ministers will decide on the Commission's recommendation at their regular meeting on July 12, a spokeswoman for the EU's Slovak presidency told Reuters.
Ministers could reject the Commission's assessment only with a qualified majority of its members, making it very unlikely that the Council may oppose the Commission's recommendation.
After the Council's decision, the Commission will have to propose sanctions "within 20 days," the EU executive said in a document.
Spain and Portugal may therefore be fined by July 27, the last meeting of the European Commission before the summer break, an EU official told Reuters.
The two countries have been under EU's excessive deficit procedure since 2009 because of surging fiscal gaps following the 2007-08 global financial crisis.
In line with the procedure, the Commission set annual targets to gradually reduce their fiscal gaps. But in 2014 and 2015, Spain and Portugal missed the agreed objectives, maintaining deficits well above the 3 percent limit.
Last year, Spain had a 5.1 percent deficit, higher than the required 4.2 percent. Portugal was required to cut its deficit to 2.5 percent of GDP in 2015, but instead had a 4.4 percent deficit.
The Commission said that Portugal missed its target to correct its fiscal gap, while Spain was "unlikely to correct its excessive deficit" by the deadline, but concluded that both countries did not take effective actions to remedy the situation.
The two countries may still escape the financial sanctions if they can show exceptional economic circumstances in a reasoned opinion sent within 10 days from the Council's endorsement of the Commission decision.