The decision, which came somewhat as a surprise, was welcomed by Portugal’s government and political parties as recognising the sacrifices made during the three years of economic adjustment under a euro-zone bailout, which the country formally exited in 2014.
The commission’s recommendation to the European Council, where European Union member states’ governments are represented, is not binding and the council can, under EU rules, decide to impose fines of up to 0.2 percent of GDP in any case.
The commission is now calling on Portugal to reduce its budget deficit to 2.5 percent of gross domestic product (GDP) this year, excluding any necessary state aid to banks - a target that is less demanding than the 2.2 percent to which the government in Lisbon was already committed.
According to the commission’s recommendation to the European Council, agreed on Wednesday, “Portugal must end the present excessive deficit situation in 2016” and “must reduce the public deficit to 2.5% of GDP”. However this “does not include the impact of the direct cost of a potential support to banking.”
The new target for the 2016 deficit is above the government’s stated target but below the level projected by the commission in its spring forecasts in May, of 2.7 percent. It is also below the commission’s latest post-bailout monitoring report, in which it said that the deficit was on track to be around 3 percent this year.
Spain, for its part, was given two years to bring its deficit down to below 3 percent.
The commission called on the Portuguese authorities to present “as early as possible”, and at the latest by 15 October, the new budgetary measures necessary for a structural adjustment equivalent to 0.25 percent of GDP by the end of the year.
At a news conference to present the commission’s decision, the commissioner for economic affairs, Pierre Moscovici, stressed that “achieving 0.25 percent of GDP of structural efforts in four months is not a little”, but said that his conversations with the Portuguese authorities in recent weeks indicate that this scenario is possible, if demanding.
If these measures are prepared in time, if the commission is able to confirm in its November forecasts that the country is on track for a deficit below 3 percent, and if these figures are confirmed in April by Eurostat, the EU’s statistics office, the commission could propose closing the excessive deficit procedures for Portugal, so lifting the continued threat that EU regional aid funds to Portugal could be suspended.
Of such a successful conclusion to the process, Moscovici said that “this is what I personally wish for our Portuguese friends, who have made many efforts in recent years.”
The commissioner went on to say that the decision to cancel the fines was “wiser, economically - since it does not compromise the hard-won recovery - and politically” not least because “the past is the past” and “today’s proposals look to the future”.
The debate took place against the background of rising Eurosceptic sentiment in several member states, and a faltering economic recovery after an unprecedented crisis within the euro zone.
At a news conference in Lisbon, Portugal’s foreign minister, Augusto Santos Silva, said the decision was “very good news for Portugal, for Europe, for the European spirit and for the spirit of European construction.”
The speaker of Portugal’s parliament, Eduardo Ferro Rodrigues, also welcomed the decision, noting that the assembly had recently voted unanimously to condemn any imposition of sanctions as “unjust, incomprehensible and counterproductive”.
Carlos Moedas, the only Portuguese on the commission, said that the decision marked “a very good day for Portugal”. He stressed that it had required “a lot of work” to reach this point, during which it was necessary “to explain the sacrifices that Portugal made, that the Portuguese made”, and said that the outcome proved that it is possible “to take political decisions within the rules” of EU institutions.
Portugal was originally supposed to have reduced its deficit to below 3 percent last year, but the cost of state aid in the resolution of a failed bank, Banif, meant that it ballooned to 4.4 percent - well over the 2.7 percent pencilled into the 2015 budget.
Despite the favourable comments in Portugal, the president of the Euro group of finance ministers of euro-zone member states, Jeroen Dijsselbloem, expressed disappointment at the decision by the European Commission to cancel sanctions against Portugal. He also warned that Portugal is still “in danger”.
“It is disappointing that there is no follow up on the conclusion that Spain and Portugal did not take effective action to consolidate their budgets,” Dijsselbloem said in a statement after the commission decision was announced.
“It must be clear that despite all the efforts already taken, Spain and Portugal are still in danger.”
Portugal especially, he added, needs to bolster its economy and competitiveness so as not to lose the ground it has gained in recent years.
Dijsselbloem said that he would await clarification from the commission on the decision and consult other euro-zone member states.
The European Council - in the shape of Ecofin, the council of economic and finance ministers - is to make its decision within 10 days. They can approve, reject or amend the recommendation, although a qualified majority is necessary to alter the commission’s recommendation to cancel the fines.
TPN/Lusa