Portugal and Spain are to be given another three weeks to correct their budget deficits so as to avoid receiving damaging EC financial penalties and sanctions.
The extension, to be announced on Tuesday June 5th, represents a compromise between Germany's tough stance on sanctions and those country leaders who want some leeway afforded to poorly performing southern European countries.
Germany's central bank leader Jens Weidmann has called for the rules to be applied and for Portugal to be penalised for its 2015 deficit, brought about largely by the failure of Banif bank and its cost to the taxpayer.
Another German, Economy Minister Sigmar Gabriel, called for EU budget rules to be made more growth-friendly and to take a softer approach to Spain and Portugal’s poor results.
The EC will give both countries until July 27th to put forward effective remedies to escape financial penalties that far from being symbolic, in Portugal’s case, could amount to a fine of around €340 million.
The Commission dodged the sanctions issue in May this year, using 'the UK Referendum on EU membership' as a reason to delay, and gave Spain and Portugal one more year to reduce their deficits, but Commissioners immediately came under pressure from those countries that wanted sanctions to be applied forthwith - rules are rules, however senseless it may be to fine a country that will have to borrow the money to pay the fine.
The decision over sanctions was postponed to July, it is now July and in another three weeks it will be near the end of August. This sort of slippage is useful to Portugal and irritating to Germany that wants to see some action.
Spain’s 2015 deficit was 5.1%, well above the 3% limit allowed. Portugal’s deficit was 4.4% of GDP, despite the Passos Coelho coalition government agreeing 3% or below.
The Commission is taking a soft line despite complaints and wants Portugal and Spain to at least try and make an effort to cut government spending, an area that PM Antonio Costa is loathed to address.
The collapse of various banks in Portugal has not helped the country’s credit rating or its deficit position in recent years.
The Banif resolution in 2015 was eye-wateringly expensive and the Novo Banco sale, if it ever goes ahead this summer, also may show a loss to the taxpayer and to the Resolution Fund if the price achieved is below the €4.9 billion break-even figure, which it will be.
Portugal’s politicians currently are engaged in blaming the former coalition and Finance Minister Maria Luís Albuquerque for missing the 2015 deficit target and there is some sympathy with this view as Albuquerque deliberately covered up the position at Banif, knowing that if Passos Coelho lost the 2015 autumn general election, the Banif problem would be for the next administration to resolve.
The problem for the taxpayer in paying for Banif is that the cost of sorting out the mess was far higher than if Albuquerque has tackled the bank earlier on. She blames the governor of the Bank of Portugal as regulator who in turn says the Banif collapse was nothing to do with him.
While all this is going on, the PM has no concrete plans to reduce public spending and hopes that increased economic activity will produce more tax revenue to enable Portugal at least to pay her Troika bills.
