Recommendation for a COUNCIL IMPLEMENTING DECISION imposing a fine on Portugal for failure to take effective action to address an excessive deficit
Date: 2016-07-27
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Portugal, budget deficit, budgetary control, budgetary equilibrium, euro area, fine, gross domestic product, public finance, sanction (EU), stability pact

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 27.7.2016  COM(2016) 519 final   Recommendation for a COUNCIL IMPLEMENTING DECISION  imposing a fine on Portugal for failure to take effective action to address an excessive deficit  
 
 
Recommendation for a 

COUNCIL IMPLEMENTING DECISION 

imposing a fine on Portugal for failure to take effective action to address an excessive 
deficit 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union, 

Having  regard  to  Regulation  (EU)  No  1173/2011  of  the  European  Parliament  and  of  the 
Council of 16 November 2011 on the effective enforcement of budgetary surveillance in the 
euro area, and in particular Article 6 thereof, 

Whereas, 

(1) 

(2) 

(3) 

(4) 

(5) 

The Council, by decision adopted on 12 July 2016, established that no effective action 
has been taken by Portugal to correct the excessive deficit in response to the Council 
recommendation of 21 June 2013 under Article 126(7) of the Treaty1. 

Following the Council's decision under Article 126(8) of the Treaty that Portugal has 
not  taken  effective  action  to  correct  the  excessive  deficit,  the  Commission  should 
recommend the Council to impose a fine.  

The fine to be imposed on Portugal should in principle amount to 0.2% of its GDP in 
the  preceding  year  but  its  amount  may  be  reduced  or  cancelled  on  grounds  of 
exceptional  economic circumstances or following a reasoned request  by  the Member 
State concerned.  

The GDP of Portugal in 2015 was EUR 179.37 billion. 0.2% of that GDP corresponds 
to EUR 358 738 200. 

In  accordance  with  Article  2(3)  of  Regulation  (EU)  No  1173/2011,  ‘exceptional 
economic  circumstances’  means  circumstances  where  an  excess  of  a  government 
deficit  over  the  reference  value  is  considered  exceptional  within  the  meaning  of  the 
second indent of point (a) of Article 126(2) TFEU, as specified in Regulation (EC) No 
1467/97.  According  to  the  latter  Regulation,  such  an  excess  is  exceptional  when  it 
results  (i)  from  an  unusual  event  outside  the  control  of  the  Member  State  concerned 
and with a major impact on the financial position of general government or (ii) from a 
severe economic downturn, meaning a negative annual GDP volume growth rate or an 
accumulated loss of output during a protracted period of very low annual GDP volume 
growth relative to its potential. 

(6) 

An evaluation of the application of the above-mentioned conditions to Portugal yields 
the following conclusions: 

  Even  though  Portugal's  annual  GDP  growth  has  contracted  more  rapidly  than 
expected in 2011 and 2012, the economy has been on a mild recovery path since 
spring  2013.  Unemployment  also  grew  considerably  until  2013  but  returned  to  a 
downward path in 2014, as the Portuguese economy eventually began to recover. 
GDP  has  been  growing  largely  above  the  growth  of  potential  output  since  2014 
and  this  situation  is  expected  to  continue  in  2016.  According  to  the  Commission 

1 

1 See Council's decision 427/1 

2 

 
 
                                                           
(7) 

(8) 

(9) 

2016 spring forecast, GDP is projected to continue growing at 1.5% during 2016, 
further  increasing  to  1.7%  in  2017.  Consequently,  there  has  not  been  a  severe 
economic  downturn  over  the  period  covered  by  the  21  June  2013  Council 
Recommendation (i.e. 2013-2015). 

  Moreover,  no  unusual  event  outside  the  control  of  the  government,  with  a  major 

impact on public finances over 2013-2015, took place. 

Therefore, exceptional economic circumstances that would warrant a reduction of the 
amount of the fine do not exist.  

On  18  July  2016,  Portugal  submitted  a  reasoned  request  to  the  Commission  to 
recommend  that  the  Council  set  the  amount  of  the  fine  to  zero.  In  support  of  its 
request, Portugal gave the following reasons: 

Portugal  recalls  the  substantial  fiscal  consolidation  effort  and  the  structural  reforms 
implemented during the recent economic adjustment programme. It also reaffirms the 
strong commitment to correct the excessive deficit in 2016, including the commitment 
to adopt measures when necessary to correct budgetary deviations, and to implement a 
fiscal  adjustment  in  2017  in  line  with  the  fiscal  country  specific  recommendation 
adopted  by  the  Council  on  12  July  2016.  Portugal  considers  that  the  application  of 
sanctions would be detrimental to the achievement of the budgetary targets correcting 
the  excessive  deficit  this  year.  It  also  points  to  economic  policy  commitments  in 
particular  as  regards  the  stabilisation  of  the  financial  system  and  the  measures 
presented  in  the  2016  National  Reform  Programme.  Finally,  Portugal  considers  any 
sanction  inappropriate  in  the  current  European  and  international  environment,  in 
particular in view of the high uncertainties arising from the outcome of the referendum 
in the United Kingdom on the membership of the European Union.   

(10)  An assessment of the abovementioned arguments leads to the considerations below. 

(11)  While  Portugal  did  not  take  effective  action  to  address  the  excessive  deficit  in 
compliance  with  the  Council's  recommendation  of  21  June  2013,  the  overall  fiscal 
adjustment from 2010 to 2014 was indeed very sizeable. The reduction of the headline 
deficit net of one-offs by more than 5% of GDP was driven by the improvement of the 
structural balance by more than 6%. The fiscal adjustment has been accompanied by a 
comprehensive set of structural reforms under the adjustment programme that has been 
successfully  completed  on  June  2014,  setting  the  ground  for  a  sounder  economic 
recovery.  Nonetheless,  this  momentum  stalled  after  the  conclusion  of  the  economic 
programme  as  highlighted  in  the  Council  decision  of  12  July  2016.  Important 
challenges remain, as the still high private and public debt levels are a burden for the 
economy, and the still high unemployment hampers economic adjustment. 

(12)  The commitment by the Portuguese authorities to correct the excessive deficit in 2016 
and respect the fiscal country-specific recommendation in 2017 is an important sign of 
the  intention  of  the  Government  to  comply  with  the  Stability  and  Growth  Pact.  For 
2016,  the  government  reiterates  its  commitment  assumed  in  the  Eurogroup  of  11 
February2  to  adopt,  when  necessary,  fiscal  measures  to  correct  any  potential  budget 
execution  deviations.  In  particular,  it  commits  to  maintaining  the  freezing  of  certain 
appropriations amounting to 0.2% of GDP as highlighted in the Stability Programme. 
The annex attached to the reasoned request provides additional information on the way 
these appropriations can be used, making more credible the commitment not to spend 
them  as  long  as  the  freeze  is  needed.  First,  it  indicates  that  the  appropriations  have 
been earmarked for public institutions whose funding has  already increased vis-à-vis 

2 

See Eurogroup Statement 47/16  

3 

 
 
                                                           
2015;  hence  they  may  eventually  not  request  more  funding.  Second,  to  access  these 
appropriations,  any  public  service  must  present  spending  authorizations  that  require 
the explicit approval of the Minister of Finance. Finally, these appropriations are also 
on  top  of  already  budgeted  appropriations  and  of  reserves  that  are  also  subject  to 
approval.  

(13)  As regards the durable correction of the excessive deficit and, in particular, the budget 
for 2017, the reasoned request refers mainly to the forthcoming Draft Budgetary Plan 
to be submitted in October and commits to compliance with the fiscal country-specific 
recommendation, which requires a structural adjustment of at least 0.6% of GDP. This 
is an improvement compared to the structural adjustment of only 0.35% of GDP laid 
out  in  the  Stability  Programme  for  2017  while  the  specific  adjustment  measures  are 
still to be defined.  

(14)  As regards the alleged detrimental effect of sanctions to the correction of the excessive 
deficit  in  2016,  the  fine  is  limited  by  Article  6(1)Regulation  (EU)  No  1173/2011  to 
0.2%  of  GDP,  an  amount  small  enough  to  be  compatible  with  the  correction  of  the 
excessive deficit. Moreover, any potential  fine  would  not  impact  the variation of the 
structural balance.  

(15)  The commitment to proceed with structural reforms in key economic policy areas and 
with measures to stabilise the banking system is welcome as indeed they are also part 
of the relevant country-specific recommendations addressed to Portugal. With respect 
to  other  structural  reforms  planned  for  2016  and  onwards,  like  those  intended  to 
improve  the  business  environment  or  address  the  undercapitalisation  of  firms,  the 
measures indicated do not depart substantially from what was already presented in the 
2016  National  Reform  Programme.  While  in  principle  these  reforms  are  sound,  they 
are subject to implementation risks. Finally, the annex refers explicitly to the need to 
define a programme to reduce non-performing loans.  

(16)  Regarding  the  appropriateness  of  the  decision  in  the  current  European  and 
international environment, the Council is fully aware of increased uncertainties in the 
current context, in particular in view of the outcome of the referendum in the United 
Kingdom on the membership of the European Union.  

(17) 

In  view  of  Portugal's  reasoned  request  and  having  regard  of  the  previous  points, 
notably the fiscal  adjustment undergone during the economic adjustment programme 
which  was  accompanied  by  a  comprehensive  set  of  structural  reforms;  the 
commitments  (i)  to  adopt,  when  necessary,  fiscal  measures  to  correct  any  potential 
budget  execution  deviations  in  2016,  (ii)  for  an  additional  structural  adjustment  of 
0.25% of GDP in 2017 compared with the adjustment of 0.35% of GDP laid out in the 
April 2016 Stability Programme, and (iii) for structural reforms in key areas in view of 
existing challenges including measures to stabilise the banking system, the reasons put 
forward  by  Portugal  are  considered  to  warrant  a  cancellation  of  the  fine  of  0.2%  of 
GDP.  

HAS ADOPTED THIS DECISION:  

Article 1 

The  fine  of  0.2%  of  GDP  to  be  imposed  on  Portugal  for  failure  to  take  effective  action  in 
response to the Council recommendation of 21 June 2013 is cancelled. 

4 

 
 
 
 
This decision is addressed to the Portuguese Republic.  

Done at Brussels, 

Article 2 

For the Council 
The President 

5