The EU is in a political bind as it looks into the unprecedented step of slapping sanctions against Spain and Portugal for breaching budget-deficit limits.
The European Commission is seeking the go-ahead from finance ministers to propose fines and a suspension of some EU regional-development funding after concluding that Spain and Portugal took inadequate steps to narrow deficits.
Should the finance ministers support the request as soon as next week, the commission would have 20 days to propose a set of penalties.
Any fines could be as high as 0.2% of the countries’ GDP, while the possible freezing of regional funds could be up to 0.5% of their GDP. The EU has three broad options, which involve different strategic considerations.
With popular scepticism about the EU’s supranational powers on the rise in Europe, and the European economy still struggling to emerge from the debt crisis, imposing penalties on eurozone countries runs the risk of being economically counterproductive, and provoking greater public disaffection with Brussels.
Sanctions could fuel support for anti-establishment forces that have even less respect for the EU’s fiscal straitjacket than do the current governments in Madrid and Lisbon.
However, after five euro-area countries, including Spain and Portugal, required emergency international aid, and following the beefing up of the European rulebook that limits fiscal deficits to 3% of GDP, the EU would risk losing its credibility as a fiscal inspector by failing to trigger sanctions against Madrid and Lisbon.
The risk of letting Spain and Portugal off the hook may be heightened by a power struggle between the EU and another southern member state — Italy — over banks.
The Italian government is pushing the commission for leeway under EU rules that curb state aid to recapitalise Banca Monte dei Paschi di Siena and other lenders without imposing losses on creditors.
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