Commission Lets South Off with Warnings Again

Italy, Portugal and Spain get a slap on the wrist for breaking Europe’s budget rules, but no penalty.

European Commission president Jean-Claude Juncker greets Spanish prime minister Mariano Rajoy in Madrid, October 21, 2015
European Commission president Jean-Claude Juncker greets Spanish prime minister Mariano Rajoy in Madrid, October 21, 2015 (European Commission)

The European Commission has let profligate member states in the south off with a warning again. Rather than fine Italy, Portugal and Spain, the executive gave all thee more time to bring their deficits in line with the bloc’s fiscal rules.

The countries have for years failed to bring their shortfalls under the European Union’s 3-percent ceiling. Yet the commission has always found an excuse not to penalize them.

This time it’s the elections in Spain. The country is due to elect a new parliament in June after talks to form a government in the wake of the last elections failed.

There is something to be said for postponing the decision until Madrid has a proper government again.

But there is always something, as the Atlantic Sentinel pointed out when we called on the commission not to show leniency this time around.

When their economies were in the tank, they couldn’t cut public spending because it would only make the situation worse. Now their economies are showing signs of growth and they can’t cut because it would nip the recovery in the bud.

The Spanish elections are anyway no reason not to sanction Italy and Portugal, countries with two of the highest debt-to-GDP ratios in the eurozone after Greece.

Both have actually slowed austerity in the last year as left-wing leaders switched to attempting stimulus.


Valdis Dombrovskis and Pierre Moscovici, the two commissioners responsible for eurozone budget issues, could barely hide their incredulity in a letter to Rome that said “no other member state has requested nor received anything close to this unprecedented amount of flexibility.”

The commission’s recommendations (PDF) for Italy don’t inspire much confidence either that it will use this extra time to get its house in order.

The assessment states outright that the government “did not make sufficient progress” toward complying with the European debt and deficit rules last year. It laments that only “limited steps” have been taken to make the national budget process more transparent. It blames a complex tax regime for hindering economic activity. It notes that productivity growth has been “sluggish”, calls privatization targets “very ambitious” (read: unrealistic) and labor reforms inadequate. (We agree.)

Other than that, though, good work!

Glass half full

The commission’s take (PDF) on Portugal is only a little more optimistic.

The country failed to make good on its promise to reduce the deficit — 4.4 percent last year, 1.7 points above target — and did not deliver on last year’s policy recommendations.

Regulatory barriers still hamper business growth and the commission calls Portugal’s institutional capacity weak.

The efficiency of Portugal’s justice system remains low, particularly in dealing with tax litigation.

Starting a business has become easier, but licensing requirements are still excessive while unpredictable administrative procedures can scare away investors.

The one silver lining is that labor reforms enacted under the previous government appear to be paying off.


It’s a little discouraging then that a new left-wing administration in Lisbon, which depends on the communists for its majority in parliament, is planning to decrease working hours, lift the minimum wage and roll back public-sector personnel and salary cuts.

These are not the actions of a government committed to liberal economic reform. They are rather the actions of a government that is trying to weasel its way out of the agreements its predecessor made with other European nations; nations that coughed up €78 billion to bail Portugal out when it teetered on the brink of collapse.

The only time Italy and Portugal took real steps to balancing their books and liberalizing their economies was when they weren’t given a choice. Whenever other European countries or the markets loosen the reins, they revert right back to form — as they no doubt will again now that the European Commission has taken sanctions off the table.

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