It looks like Portugal and Spain might finally be sanctioned for breaking the eurozone’s budget rules.
The European Commission said on Tuesday the two had failed to take “effective action” to bring their shortfalls under the 3-percent treaty ceiling. But it stopped short of recommending fines, leaving that decision to the finance ministers.
They should take action. As Pierre Moscovici, the European commissioner in charge of economic policy, said, the fiscal rules “have to be respected.”
For years, southern member states like Portugal and Spain have got respite after respite to bring down their deficits.
As recently as May, the European Commission gave them more time to submit revised budget plans.
But they always come up with an excuse for not going through with the penalty procedure, as I argued here last year:
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.
It’s not like Portugal and Spain have used the extra time to rush through reforms.
In the case of Portugal, it’s not just that its deficit is over target; it’s that its economic reforms have so consistently underwhelmed.
For years, the European Commission has urged Lisbon to lift regulatory barriers that hamper business growth. For years, it has warned that Portugal’s justice system is inefficient, that licensing requirements are excessive, that unpredictable administrative procedures deter investors. None of this has changed.
To be fair, the country has done labor reforms that are paying off. But they were enacted under the previous, right-wing government. António Costa’s left-wing coalition is actually overturning some of the liberalizations and cuts that his predecessor made.
Spain has done better and there’s a good chance the right will stay in power so the austerity program of Prime Minister Mariano Rajoy isn’t canceled.
Growth has returned and unemployment is falling now that businesses and consumers are regaining their confidence. But one in five Spaniards is still out of work and the economy is still 4 percent smaller than before the crisis.
Rajoy’s conservatives had good reason not to push too hard in their first term. The reforms they enacted — allowing companies to opt out of sectorial bargaining agreements, for example, and reducing severance payments — were controversial.
But that’s why Spain wasn’t made to suffer the consequences of its high deficit spending in the past.
Now that Rajoy has been reelected and the economy is recovering, there is no justification anymore for putting off the hard work of cutting spending.