How Spain and Portugal dodged EU sanctions (for now)

Sign at anti-austerity rally in Portugal reads 
"Their fortune, my crisis" and "Without food, there will be no peace"
By Dick Nichols September 10, 2016 — Links International Journal of Socialist Renewal — A month ago, on August 8, it became official—the high school governors agreed that the headmaster had acted correctly in not caning the two miscreant schoolkids. The schoolkids are Spain and Portugal; their misdemeanour was to keep missing the public sector deficit reduction targets that are set under the European Union’s “excessive deficit procedure”; the headmaster is the European Commission, headed by president Jean-Claude Juncker; and the school governors are the finance and economy ministers of the EU’s 27 member states (who meet as the Ecofin committee). Any one of the member states could have objected to the European Commission’s July 27 provisional decision apparently supporting leniency for the two repeat offenders. But none did. Their acquiescence was in line with the fact that, at a fraught three-hour June 27 meeting to decide on penalties, only four of the EU’s 27 commissioners (ministers) proposed an exemplary caning for Portugal and Spain. In this way, just over a year after their sadistic thrashing of the SYRIZA-led Greek government, the EU institutions decided to allow the two Iberian countries to walk away with a “zero fine” and a warning that they were under “strict oversight”. Of course, the delinquent states were also put on a good behaviour bond. They will have to meet harsh new deficit reduction deadlines, including specific final goals less than the EU minimum of 3% of GDP. Meeting them will require cuts and/or tax hikes. They also only have until October 15 to explain how they will meet these targets. For both countries any “windfall gains must be used to accelerate deficit and debt reduction” and they must “be ready to adopt further measures should budgetary risks materialise” (August 8 Ecofin statement) Whether they get the European structural and investment funds already due to them is also still undecided — until a “structured dialogue” takes place between the European Commission and the European parliament. Spain stands to lose €1.2 billion and Portugal €500 million if these funds are withheld. As a result, the political conflict over “excessive” deficits in the EU’s member states has only been postponed for a couple of months. It will reappear in Spanish and Portuguese national politics, and in the European parliament as well. Elastic targets never met Nonetheless, how and why the EU powers-that-be decided to dodge the clash for now—including the role played by “arch-hawk” German finance minister Wolfgang Schaüble—throws a lot of light on how politics has been shifting in Europe. There was no doubt that both countries were guilty as charged. They were supposed to have cut their public sector deficits to the 3% of GDP stipulated in the EU Stability and Growth Pact by 2015, but Spain only managed 5.1% and Portugal 4.4%. A July 12 Council of the EU media release said both were guilty of “falling significantly short” of their obligations. The two countries had been missing progressively softer targets ever since 2009, despite Spain having had deadlines eased three times and Portugal twice. With the August 8 decision, the farce of deadline shifting continues. For example, Spain is now to reduce its budget shortfall to 4.6% this year, 3.1% in 2017 and 2.2% in 2018. Yet under the original targets set in March 2009, the Commission required Spain to “ensure a government deficit below 3% of GDP in 2012 in a credible and sustainable manner”. If Spain finally gets it government budget deficit under this figure before 2018, it will be over five years behind schedule. Despite these breaches, the background documents prepared in Brussels to guide the European Commission’s July 27 decision were receptive to the Spanish and Portuguese cases for clemency. According to commentator Javier Santacruz in the August 10 edition of the Spanish web site magazine Ctxt : “It is certainly strange and paradoxical for Brussels to ‘buy’, point by point and without so much as a critical comment, the arguments of the [Spanish] economy ministry. “We are dealing with a decision whose character is political more than technical: if we have regard for the prevailing legal framework … Spain should be penalised with a fine equal to 0.2% of 2015 GDP [€2.1 billion] because it hasn’t even respected the postponed targets of deficit reduction that the government itself promised to meet.” (emphasis added) The only grounds for waiving such a fine that the EU regulations recognise are “an extraordinary incident outside the control of a member state that seriously affects the financial situation of public administrations” or a prolonged recession that drags a national economy’s output well below its potential. Greece certainly fulfilled this last condition (with GDP now nearly 30% below its 2009 level), but despite the recent recession Spain does not (it is still growing quite strongly), nor does Portugal (growing weakly). The politics of U-turn The Brussels’ functionaries apparently weren’t troubled by such inconsistencies, in effect endorsing the case for leniency made by the Spanish econocrats, who boasted their country’s status as a “special case” and of its “deep-going reforms”. (Of these “reforms” there are only two that have had any measurable impact on the Spanish economy: two rounds of labour market deregulation that have slashed wages and working conditions and a €51 billion finance-system bailout at taxpayer expense.) Portugal’s arguments were simpler—it would effectively reach the 3% target by 2016 because the measures to achieve it were already in place and, in any case, any Portuguese budgetary misdemeanours were not the fault of the Socialist Party government of Antonio Costa, in office since only November 2015. So why the EU’s U-turn? This question is essentially one about the German government: why did the Angela Merkel administration—which has the most influence on EU policy, has never stopped insisting that “rules are rules” and led the war on Greece in 2015—have a sudden attack of flexibility with regard to Spain and Portugal? In the first week of July, German finance minister Schaüble was still insisting that “the rules must be respected” while Günther Oettinger, the German European commissioner for the digital economy, was telling gutter rag Bild that “if the Commission wants to maintain its credibility, we have to adopt sanctions now. Anything else would be inexplicable.” Yet just a fortnight later, Schaüble was pressing Oettinger to soften his position and ringing around the EU commissioners and his fellow finance ministers finance ministers to say (in the words of “EU sources” cited by the July 28 Spanish daily El País) that: “The sanctions won’t be necessary; for Germany, Ecofin’s decision that Spain and Portugal did not take effective measures and that they will remain under strict oversight is enough.” Some European media coverage of the decision ascribed the German volte-face to political debts of the German government and the European Commission to the conservative Spanish People’s Party government of prime minister Mariano Rajoy, as well as to clever tactical footwork by Juncker. These were at best secondary influences that even if absent wouldn’t have changed the decision. The basic cause of the U-turn was that Schaüble became convinced of the need to organise the retreat of the other “rules-are-rules” hardliners in response to a panicky offensive by EU commissioners and finance ministers from the Mediterranean member states and Portugal. Conservative and social democrat officials alike from this EU “periphery” were quaking at the prospect of popular reaction to EU sanctions —not only in Portugal and Spain, but in France, Italy and Greece as well. Nightmare scenarios The sanctions being considered would have been the first ever imposed on any EU member state, and this when both Germany and France have avoided sanctions for their own “excessive” deficits in the past. They would have been imposed on countries that have suffered most from the economic crisis and in the Portuguese case they would have been imposed on the EU’s own “model student” in applying austerity policies. As Costa, warning of the likely impact, said on July 25: “It is incomprehensible that the very same commissioners who said that the action of the previous government was exemplary now want to apply sanctions for a deviation of two percentage points [amount by which the Portuguese deficit is estimated to exceed the EU 3% baseline this year]. “ Had they come about, the sanctions would have almost certainly wrecked the painstaking efforts of the Spanish establishment to impose a pro-austerity government after two rounds of general elections have left the country with only a caretaker administration. In Portugal, they would have strengthened the position of the Left Bloc in Portugal, which made it clear at its 10th National Convention in July that it would demand from the Costa government a referendum on whether such sanctions should be paid. In Italy, sanctions would have strengthened the position of the Eurosceptic Five Stars movement against social democratic prime minister Matteo Renzi. Five Stars candidates won important cities (including Rome) in the June council elections, and Renzi faces a very tight struggle to win an October referendum limiting the powers of the Italian senate. In France, they would have further boosted the National Front, already leading in polling for the 2017 presidential elections. Little wonder, then, that the most energetic lobbyers for leniency were the Portuguese, Spanish and Greek commissioners Carlos Moedas, Miguel Arias Cañete and Dimitris Avramopoulos (all conservatives) and Italian social democrat Federica Mogherini, the EU High Representative (foreign minister). These officials convinced the weightiest of their Northern European counterparts—Schaüble and Dutch first vice-president Frans Timmermans (social democrat)—that persisting with sanctions would set off a North-South crisis within the EU institutions. The almost certain result would have been to strengthen the positions of the Eurosceptic and xenophobic right (in the North and France) and of the radical left (in Spain and Portugal). In this atmosphere, and with Brexit still fresh in the memory, even the strongest supporters of “rules are rules”—led by Latvian commission vice-president Valdis Dombrovskis—thought the better of proposing that Spain and Portugal pay the full 0.2% of GDP fine envisaged in the EU regulations. But even Dombrovskis’ alternative—halving the fine to 0.1% of GDP—could only find three other supporters after Schaüble decided for tactical retreat. They were Oettinger, Finnish jobs commissioner Jyrki Katainen and Swedish trade commissioner Cecilia Mälstrom. Katainen said: “If we don’t do this today, there will never be sanctions.” Timmermans reply was that even symbolic sanctions would be a huge gift to Euroscepticism. Avramopoulos said: “Sanctions are not paid by politicians: they fall on the shoulders of the people. The Portuguese and Spanish have already made many sacrifices, and they would not understand such a decision.” French social democrat and EU economics commissioner Pierre Moscovici was candid about the reasons for the Commission’s decision: “Even a symbolic fine would not have been understood by people. A punitive approach would not be the right one at a time when people doubt in Europe… “Europe doesn’t need another crisis to deal with right now. Amid the migrant crisis, the terrorist threat, the Brexit vote and rising populism, it doesn´t need a conflict over fiscal rules as well.” Conclusion The August decision on Spain and Portugal could well come to be seen as the last gasp of an increasingly naked pretence—that the actions of the EU’s institutions simply represent a disinterested execution of EU laws and rules. As the off-the-record comment of one European commissioner reported in the July 28 El País put it: “The Stability [and Growth] Pact is dead and buried.” Commission president Junker acknowledged as much at the end of the July 27 meeting: “The past is the past and a sanction will not change that: the threat of freezing funds and the new deficit targets, combined with strict oversight, are the right strategy for both countries to get their accounts in order.” Many conservatives worry about this enforced turn to undisguised realpolitik. “Brussels”, from being the stern but principled headmaster requiring its delinquent states to abide by “tough but fair” common standards, becomes an increasingly arbitrary enforcer of austerity making up the rules as it goes along. Most important of all, the credibility of any EU-imposed debt and deficit reduction targets are more than ever called into question. This was already the case with Greece, especially given the cogent arguments of its former finance minister Yanis Varoufakis. Similarly, according to what economic logic have the new targets for Spain and Portugal been set (especially as economic slowdown seems increasingly likely in the EU)? Bundesbank president Jens Weidmann expressed this concern in an interview with the August 4 Die Zeit: “[T]he rules have become a fair-weather event and fail to exert any binding force.” He added: “If it is clear that the rules are not up for negotiation at all times, it will, by the way, make it easier for governments to push through consolidation in political terms. It is my perception that acceptance of the EU among the general public is also suffering from the fact that our jointly agreed rules are not being complied with… “At some point, infractions against the rules have to have consequences. In my opinion, the Commission and the European Council aren’t consistent enough.” This stance was echoed by the vice-chair of the European Parliament’s economic and monetary affairs committee, conservative Markus Ferber: “This decision is not only disappointing, but it destroys the confidence and credibility of our rules—it is a bad day for our common currency.” Weidmann and Ferber don’t seem to have understood what had dawned on their finance minister Schaüble—that “consistent application” of the rules in the present European political environment could have seriously shaken the system. This was why, incidentally, former European Commission president Romano Prodi always described the Stability and Growth Pact as “stupid”—its rules could force the EU establishment to go to war on grounds favourable to its enemies. The August 8 decision was a small but definite win against austerity, but those who helped bring it about are under no illusion about the struggles that lie ahead. As Left Bloc MP Isabel Pires wrote on the Portuguese website The Contradiction on July 28: “For Portugal at the moment, the sanctions process seems to have ended, but for the Commission it has not. Over the coming months the attempts to punish us by other means will be many and creative. If for now this setback in the implementation of sanctions can be considered a defeat for the Commission, the battle is still far from over.” Dick Nichols is Green Left Weekly’s European correspondent, based in Barcelona. A shorter version of this article will appear in the latest edition of GLW.