Eurozone Sets Out New Fiscal Targets for Spain and Portugal

BRUSSELS—Eurozone governments set out new fiscal targets for Portugal and Spain as they backed the decision by the European Union’s executive not to fine them for missing deficit targets.

The European Commission had recommended last month after protracted discussions that the two countries should not be fined. The commission acknowledged the difficult economic environment and the reform efforts of both countries, but the decision led some to warn the bloc’s fiscal rules were being dangerously undermined.

However, in a statement released on Tuesday, eurozone governments agreed with the European Commission’s arguments about dropping the fines, which, at 0.2% of gross domestic product, could have amounted to billions of euros for the cash-strapped authorities of Spain and Portugal.

Eurozone finance ministers said they wanted to see Portugal implement consolidation measures amounting to 0.25% of GDP this year, with all windfall gains from one-off measures used to accelerate deficit reduction.

“Fiscal consolidation measures must secure a lasting improvement to the government’s budgetary balance in a manner conducive to economic growth,” the statement said.

Portugal was therefore tasked with reducing its deficit from 4.4% of GDP last year to 2.5% this year.

Portugal, which was under an international bailout program between 2011 and 2014, has sharply cut its budget deficit from close to 10% of GDP in 2010. Excluding a capital injection into a failed lender in December and smaller one-time items, Portugal’s 2015 deficit would have been slightly over the 3% limit.

Portugal’s Finance Ministry underscored its commitment to meeting the budget targets in a statement on Tuesday.

Spain, which has been without a government since last December, was told to meet the 3% deficit target by 2018 at the latest, with eurozone governments tasking the new government to cut the deficit from last year’s 5.1% of GDP, to 4.6% in 2016, 3.1% in 2017 and 2.2% in 2018.

Spain’s fiscal watchdog, known as Airef, said three weeks ago that it expects this year’s budget deficit to be between 4.1% and 4.7% of GDP, depending on whether the government successfully implements proposed tax measures.

Figures released by Spain’s central bank in early June also indicate that Spain appears to be roughly on track to meet Brussels’ targets in 2016, but subsequent years will require stepped-up efforts. The Bank of Spain said it anticipates Spain will reach a budget deficit of 4.1% of GDP this year, 3.4% in 2017 and 2.9% in 2018.

In 2013, Spain was given until 2016 to correct its deficit. But the eurozone governments acknowledged it would be a mistake to push a new government there to tighten policy too quickly.

“Granting Spain one additional year to correct its deficit would require a structural balance adjustment that would have too negative an impact on growth. The council therefore considers it adequate to extend the deadline by two years,” they said.

Spanish Finance Minister Luis de Guindos has repeatedly said he expected sanctions to be zero, arguing it would be illogical to punish a country that has followed the policy advice of eurozone authorities to shift from a recession to growth. Last year, Spain’s economy grew 3.2%, one of the fastest rates among major eurozone countries.

Both governments need to take action—and set out their fiscal plans—by Oct. 15, as the clock ticks for Spanish political leaders to form a government.

Under the EU’s fiscal rules, governments have to bring their deficits to below 3% of gross domestic product, while debts shouldn’t be higher than 60% of GDP.