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EU backs sanctions on Portugal, Spain for breaking deficit rules

Targeting public deficit below 3 percent: Spain’s de Guindos
Targeting public deficit below 3 percent: Spain’s de Guindos

Finance ministers of the European Union (EU) backed sanctions on Spain and Portugal for breaching European rules on budget deficit targets on Tuesday.

"The Council found that Portugal and Spain had not taken effective action in response to its recommendations on measures to correct their excessive deficits ... The Council's decisions will trigger sanctions under the excessive deficit procedure," the European Council said in a statement on its website on Tuesday.

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The decision came after a meeting in Brussels on Tuesday of the EU's economic and financial affairs council (or Ecofin), made up of economic and finance ministers from the bloc.They met to discuss if Spain and Portugal should be sanctioned for breaching rules stating that countries' budget deficits must remain within 3 percent of gross domestic product (GDP).

The European Commission — the executive arm of the EU — now has 20 days to recommend if fines should be imposed.

"Those fines should amount to 0.2 percent of GDP, though Portugal and Spain can submit reasoned requests within 10 days for a reduction of the fines," the council said in its statement on Tuesday.

However, Spain's acting economy minister, Luis de Guindos, said he believed any fines imposed would be "null or zero," according to Reuters.

He added that Spain would revise corporate tax regulation to knock 6 billion euros ($7.9 billion) off the state budget and would save another 1.5 billion euros through low interest rates on public debt, according to Reuters.

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De Guindos told CNBC on Tuesday that he was sure Spain could get its deficit below three percent by 2017.

"With respect to the situation for Spain it would be something of a paradox to impose a financial penalty to the best-performing European economy, which is Spain. And I think this consideration is shared by many people, not only at the Eurogroup but also at the Ecofin," he told CNBC on Tuesday.

The Commission warned both Spain and Portugal back in 2013 to do more to address their budget deficits. Last week, the Commission said Portugal had not corrected its "excessive" deficit by the deadline it was given of 2015 and that Spain was unlikely to correct its deficit by the 2016 deadline.

Spain's headline deficit peaked at 11 percent in 2009 during the height of the financial crisis, before falling to 10.4 percent of GDP in 2012 and 5.1 percent in 2015, while the recommended target for 2015 was 4.2 percent of GDP. Portugal, meanwhile, saw its headline deficit decline from 11.2 percent of GDP in 2010 to 4.4 percent in 2015, while the recommended target for 2015 was 2.5 percent of GDP.

However, EU officials are wary to impose fines on countries that are still recovering from the financial crisis. There is also little political appetite to do anything that could increase anti-EU sentiment, particularly after euroskepticism led to a majority of Britons voting to leave the EU last month.

Need to stabilize Europe's banks: Portugal Fin Min
Need to stabilize Europe's banks: Portugal Fin Min

Portugal's Finance Minister Mario Centeno told CNBC on Monday that sanctions would not be appropriate, but stopped short of calling Portugal's treatment unfair.

"We will do our job, which is precisely to argue in favor of no sanctions for Portugal — at least a very low level of sanctions. The point here is we do have our incentives right and we are very much committed to our fiscal consolidation," Centano said.

Pierre Moscovici, European commissioner for economic affairs, told CNBC on Monday that the Commission wanted to act in a "credible" manner.

"This Commission wants to respect the rules. This Commission wants to be credible and stability is our road map … We don't want to penalize economies in recovery and we know that Portugal and Spain suffered from a severe crisis and the priority for them is to reduce unemployment. So dialogue is a good quality," he said.

He added that the threat of sanctions alone "probably will lead to a stronger correction and to a clearer point of view."

Don't want to penalize economies in recovery: EC's Moscovici
Don't want to penalize economies in recovery: EC's Moscovici

France and Italy

Spain and Portugal are by no means the only or indeed worst offenders when it comes to breaking EU deficit rules.

France and Italy (the euro zone's second- and third-largest economies respectively) have come under repeated fire for breaking deficit rules.

France now has until 2017 to bring its deficit into line — it looks set to achieve it having reached a deficit of 3.5 percent in 2015.

Meanwhile, Italy won what Dombrovskis called an "unprecedented amount of flexibility" from the Commission in May that gave it more time and leeway to meet budget deficit targets.

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Eyebrows have been raised over the Commission's apparent tolerance for rule-breaking (or reluctance to punish offenders).

The Ifo Institute noted last month that since 1999 there had been 165 instances of EU states breaking the deficit rules. Ifo President Clemens Fuest said the amount of deficit violations was "astonishing" and showed the rules were not working.

The Munich-based institute listed the worst violators of deficit rules and France topped the list with 11 violations, ahead of Greece, Portugal and Poland with 10 each. The U.K. had nine violations, Italy (eight), Hungary (seven) and Ireland and Germany had five each.

"In contrast, strong budgetary discipline was evident in Luxembourg, Estonia, Finland, Denmark and Sweden, each with zero violations," Ifo said. Its calculations were based on figures from the EU Commission between 1999 to 2015.

—With contribution from CNBC's Nancy Hulgrave. Follow CNBC International on Twitter and Facebook.