European Commission President Jean-Claude Juncker is pushing to fine Spain and Portugal for failing to abide by EU budgetary rules, according to officials involved in the discussions.
If the College of Commissioners agrees with him on Wednesday, as expected, it will be the first time EU member countries will be punished for repeatedly breaching the bloc’s annual budget deficit limit of 3 percent of economic output.
EU rules stipulate fines of up to 0.2 percent of a country’s GDP that the Commission and EU finance ministers in turn are free to reduce or even cancel. Another possible sanction involves restricting EU funds used for infrastructure projects such as bridges or roads to both countries, but that won’t be on the agenda Wednesday.
Juncker had earlier this summer been opposed to a Commission-imposed fine but has pivoted in recent weeks, say people familiar with his thinking. The shift reflects his view that EU governments must be made to take ownership of the decision to punish fellow eurozone countries rather than pass the fraught call to the Commission. Since the final call rests with finance ministers, an EU diplomat said, Juncker figures that proposing serious sanctions will put them on the spot — to either agree or disagree with him.
When commissioners arrive for their last meeting before summer break, they will find on the table two draft papers for each country, one with recommendations for the governments on the “fiscal path” to follow to reduce their deficits and the other on sanctions.
The latter lists two options for the commissioners to pick from. Option 1 “proposes to cancel the fine,” according to an internal Commission memo sent to cabinets that POLITICO obtained. Option 2 “proposes to halve the fine, i.e. to set it at 0.1 percent of GDP,” or up to €1.1 billion for Spain and €179 million for Portugal.
It will be “very difficult” for the Commission to let Spain or Portugal off without a fine, one official said, adding that the likelier outcome is a reduced fine of under 0.1 percent of GDP.
Whatever they decide, it’s going to be a highly political decision, given the divergence of opinion among EU governments and commissioners on the issue.
Juncker will meet with the two key commissioners in charge of overseeing member countries’ compliance with EU fiscal rules — Valdis Dombrovskis and Pierre Moscovici — in the morning to put them on the same page before all College members (minus the U.K. commissioner) gather, according to aides.
“The president meditates,” an aide to Juncker said last weekend, referring to the fact that the Commission chief is exploring the uncharted territory of having to fine countries for their governments’ lack of budgetary discipline.
What Juncker actually was meditating on over the last few weeks, the EU officials said, is how to balance politics and personal frustrations with other significant political and economic players such as France and Germany that have pulled him in opposite directions.
Having been head of the Eurogroup of eurozone finance ministers, Juncker is said not to be a deep believer in the deterrent effects of fines or sanctions on governments. In addition, people familiar with his thinking said Juncker is skeptical of the idea that it’s economically right for the EU to make Spain and Portugal pay now after having first bailed them out during the euro crisis. And all the more so since the current Socialist-led Portuguese government came into office only late last year and wasn’t responsible for causing the excessive budget deficit. Meanwhile, Spain still doesn’t have a government in place after two inconclusive votes.
But rules are rules, and both countries have clearly violated the EU budgetary law: With Spain’s deficit at 5.1 percent last year and Portugal’s at 4.4 percent, the EU finance ministers declared on July 12 that both countries had failed to take “effective action” to bring them down.
According to officials, Juncker hates to be criticized for being either too soft or too hawkish on governments that don’t abide by EU rules. He has been targeted by EU finance ministers such as Michel Sapin of France who defended Portugal, while his German counterpart Wolfgang Schäuble accused the Commission of not doing enough to enforce the rules.
As EU rules say the final decision on sanctions is in the hands of the Council of EU finance ministers, this may tempt Juncker “to revive the narrative that it’s for the Council to decide,” an EU diplomat said. That is, by recommending tougher sanctions than expected, which the ministers would have to further debate before deciding to reject or amend, Juncker would put the ball in their court.
The beauty of this approach is that the commissioners can turn on their heads a complaint often heard in Brussels that ministers want the Commission to be tough so they themselves can show mercy on their colleagues. With a high probability that the Council of ministers will want to be lenient with their Spanish and Portuguese colleagues, Commission sources say Juncker has a mischievous appetite to propose more fines than the ministers are ready to impose on both countries.
If so, the Council would have to arrange what the Council’s legal service, in an internal briefing that POLITICO has obtained, called an “explicit act” to reject or amend the Commission recommendation through either a physical meeting or a written procedure.
The Commission’s thinking, according to officials, goes like this: The Council would have to schedule an emergency meeting and debate any tougher-than-expected Commission proposal, rather than okaying it in a silent procedure in the case of zero fines — which is still what the ministers are expecting to emerge from the College on Wednesday, diplomatic sources said. One EU diplomat noted that it’s hard for him to imagine organizing a qualified majority of EU countries that Portugal and Spain would need to vote down the sanctions without a physical meeting.
Incidentally, the next regular meeting of the Council “is not scheduled before the second half of September,” as the legal service duly notes.
Parliament claims say
Meanwhile, according to a letter that Martin Schulz, the president of the European Parliament, sent to Juncker on Monday, the Parliament intends to make the best use of a provision found in the thicket of the EU’s economic governance rules and claim the right to have a say on the potential freezing of EU infrastructure funds to both Spain and Portugal as part of the sanctions.
“By the means of this letter … I invite the Commission to a structured dialogue,” Schulz wrote in his missive, a copy of which POLITICO obtained. The regulation in question — 1303/2013, for those who care — entered into force only at the end of 2013, and it would be the first time that the Parliament gets a say in an affair that’s otherwise for Commission (to propose) and EU governments (to adopt) only.
But Schulz wrote that the talks about a freeze of payment commitments could start “at the earliest possible opportunity after the summer recess.” As his statement implies, a potential suspension of EU infrastructure funding to Spain and Portugal will not be put before the commissioners on Wednesday.
Instead, the Commission will prepare a proposal on the funding cuts over the summer, said an EU official involved. Spain stands to lose access to as much as €1.2 billion and Portugal €500 million in structural funds, according to an EU diplomat. The endangered funds and loan programs for Spain fill three A4 pages.
It’s worth noting that Schulz addressed his letter to Juncker, rather than responding to the Commission’s representative who had written to him on July 14 to inform him of the Parliament’s right to intervene in the Spanish-Portugal case. This happened to be the Commission’s fiscally hawkish Vice President Jyrki Katainen, whom Schulz did bother copying in his response.
In return for the Parliament claiming its say in the EU’s budgetary affairs, it’s offering to team up with the Commission not to cut off funding for Spain and Portugal. Given the strong personal and working relationship between Juncker and Schulz, whatever funding-cut proposal the Commission eventually makes to the two EU countries, more likely to be soft than tough, it will need Schulz’s stamp of approval.