Brexit, Spanish Elections Loosen Fiscal Discipline in the Eurozone
The first negative effects of Brexit are hitting European economic policy. Afraid of further centrifugal forces in the European Union, the European Commission decided not to fine Portugal and Spain for breaching the prescribed 2015 budget deficit targets. Brussels had the power to impose a fine of 0.2 percent of GDP, which would have amounted to €2 billion for Spain and €300 million for Portugal. It chose not to do so.
Both countries diverged significantly from their stated intentions. Spain’s budget deficit in 2015 was 5.2 percent of GDP versus the EU target of 4.2 percent. Forecast deficits are 4.6 percent of GDP in 2016, 3.3 percent in 2017, and 2.7 percent in 2018, compared with targets of 3.6 percent, 2.9 percent, and 2.2 percent of GDP in 2016, 2017, and 2018, respectively. Portugal’s deficit was 4.4 percent of GDP in 2015 as opposed to the 2.7 percent EU target. The general government deficit is expected to decrease to 2.7 percent of GDP in 2016 and 2.3 percent in 2017.
In Spain, the government gross debt-to-GDP ratio rose from 36 percent in 2007 to about 99 percent in 2014. The debt ratio is expected to peak at 100.6 percent of GDP in 2017, well over the eurozone target of 60 percent. In Portugal, the gross debt-to-GDP ratio rose from 71 percent in 2007 to 130.2 percent in 2014. The debt ratio is projected to decrease to 126 percent of GDP in 2016, and subsequently to 124.5 percent of GDP in 2017, twice the EU target.
After months of grandstanding, Brussels gave the two Iberian countries additional time to reach their targets and waived any fines. Under the revised prescription, Spain must reduce its budget shortfall to 4.6 percent of GDP in 2016, 3.1 percent in 2017, and 2.2 percent in 2018—giving the country two extra years to meet its target. Portugal was given one extra year.
Pierre Moscovici, the EU’s financial affairs commissioner, indicated the move was motivated by waning support for EU institutions. “Even a symbolic fine would not have been understood by people,” he said. “A punitive approach would not be the right one at a time when people doubt in Europe.” Coming just weeks after the Brexit vote, the European Commission’s argument shows fear that Brexit can be used as an example for other countries to follow. To prevent that, Brussels has shown willingness to bend its own rules.
There is an additional reason why the European Commission was so lenient towards Spain. The ruling European People’s Party (EPP), the organization of center-right parties in Europe, does not want to cede the country, after losing elections in Finland, Greece, Poland, and Portugal in recent years. The president of the European Council and the president of the European Commission are both from the EPP, as are the majority of EU commissioners. So is Mariano Rajoy, the acting prime minister of Spain, who is trying to form a government after inconclusive elections. Helping a friend in need: This is how European EPP politicians may have rationalized the granted extension.
This is not the first time the European Commission has bent its budget rules. France, for example, has been in the excess deficit procedure since 2009, with various extensions given. It is expected to leave the procedure in 2017, if all goes well. If not, we may expect another extension. Which, ironically, is one of the rationales for Brexit: Europe’s inability to keep its word.