Recommendation for a COUNCIL IMPLEMENTING DECISION imposing a fine on Spain 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: Spain, 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) 517 final   Recommendation for a COUNCIL IMPLEMENTING DECISION  imposing a fine on Spain for failure to take effective action to address an excessive deficit  
 
 
Recommendation for a 

COUNCIL IMPLEMENTING DECISION 

imposing a fine on Spain 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  Spain  to  correct  the  excessive  deficit  in  response  to  the  Council 
Recommendation of 21 June 2013 under Article 126(7) of the Treaty.  

Following the Council's decision under Article 126(8) of the Treaty that Spain 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 Spain 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 Spain in 2015 was EUR 1081.19 billion. 0.2% of that GDP corresponds 
to EUR 2162.38 million. 

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 Spain yields the 
following conclusions:  

  Following ten consecutive quarters of negative real GDP growth, economic growth 
in Spain resumed in the third quarter of 2013. Real GDP growth reached 1.4% in 
2014 and accelerated to 3.2% in 2015. According to the updated Commission 2016 
spring  forecast,  real  GDP  growth  is  expected  to  reach  2.9%  in  2016.  This  is  an 
upwards  revision  of  0.3  pp.  compared  to  the  Commission  2016  spring  forecast, 
driven by higher-than-expected public and private consumption in the first quarter 
of the year. Consequently, there has not been a severe economic downturn over the 
period covered by the 21 June 2013 Council Recommendation (i.e. 2013-2016).  

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(7) 

(8) 

(9) 

  Moreover,  no  unusual  events  outside  the  control  of  the  government,  with  major 
impact  on  public  finances  over  2013-2016,  took  place.  Even  though  Spanish 
inflation surprised on the low side and was even negative in 2014, its impact on the 
public finances was not major as it was largely offset by higher-than-expected real 
GDP  growth,  with  fast  job  creation  and  a  tax-rich  composition  of  growth 
benefitting the deficit reduction.  

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

On  13  July  2016,  Spain  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, Spain gave the following reasons:  

Spain  recalls  its  important  achievements  in  implementing  a  far-reaching  reform 
agenda,  despite  a  very  challenging  economic  context,  that  proved  decisive  in 
supporting  the  strong  rebound  of  economic  activity  and  job  creation,  as  well  as  the 
correction  of  accumulated  imbalances.  It  also  highlights  the  significant  fiscal  effort 
implemented  in  the  wake  of  the  crisis  and  the  negative  impact  of  low  and  even 
negative  inflation  on  the  fiscal  adjustment  process  and  the  economy  as  a  whole. 
Methodological  issues  are  also  raised,  concerning  the  alleged  inability  of  the  current 
methodology to assess SGP compliance to take account of negative inflation surprises 
or to accurately measure potential GDP growth in the case of Spain. Finally, it reports 
on measures and commitments taken to reduce the public deficit in 2016 and reaffirms 
the commitment to correct the excessive deficit by 2017. 

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

(11)  The  Spanish  economy  has  experienced  a  significant  turnaround  in  recent  years,  also 
thanks to reforms undertaken in a challenging economic environment that helped ease 
existing  rigidities  in  labour  and  product  markets.  The  successful  completion  of  the 
financial  assistance  programme  for  the  recapitalisation  of  financial  institutions  in 
Spain  in  early  2014  and  the  major  structural  reforms  that  have  been  carried  out 
alongside created a sound basis for the economic recovery. Also after the completion 
of  the  programme,  Spain  continued  to  implement  structural  reforms,  including  a 
reform  of  the  insolvency  framework,  the  completion  of  the  banking  sector 
restructuring,  the  public  administration  reform  and  the  creation  of  an  independent 
fiscal  council.  Helped  by  monetary  policy  and  a  reinforced  euro  area  governance 
framework, this paved the way for a return of capital inflows and improved financial 
conditions.  As  growth  resumed  in  the  second  half  of  2013,  internal  and  external 
rebalancing  advanced,  also  supported  by  reform-induced  competitiveness  gains.  The 
recovery  is  accompanied  by  strong  job  creation,  supported  by  continued  wage 
moderation and the impact of labour market reforms. Notwithstanding the progress in 
rebalancing the economy, important challenges remain, as still high private and public 
debt  reflected in  the very high  level of net external liabilities exposes the country  to 
risks stemming from shifts in market sentiment, and still high unemployment hampers 
economic adjustment. 

(12)  While  Spain  did  not  take  effective  action  to  address  the  excessive  deficit  in 
compliance  with  the  Council's  recommendation  of  21  June  2013,  it  should  be 
acknowledged  that  Spain  had  already  delivered  sizeable  fiscal  efforts  to  correct  its 
excessive  in  the  budgets  for  2012  and  to  a  lesser  extent  2013.  The  consolidation 
fatigue highlighted by the Council decision of 12 July 2016 followed this substantial 
fiscal structural effort and occurred after difficult economic conditions that impinged 
on social cohesion. Indeed, notwithstanding the strong rebound of the economy since 

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(13) 

the third quarter of 2013, Spain kept experiencing unfavourable economic conditions 
during  the  period  covered  by  the  last  Council  recommendation.  The  output  gap 
reached −8.5% of potential GDP in 2013 and, while improving fast, it was still largely 
negative,  at  −4.0%,  in  2015.  The  unemployment  rate  peaked  at  26.1%  in  2013  and 
social exclusion and inequality worsened in the wake of the crisis, bringing the overall 
share  of  people  at  risk  of  poverty  or  social  exclusion  to  29.2  %  in  2014,  one  of  the 
highest rates in the EU.  

In this context, while some of the measures taken in recent years had a negative direct 
impact on the public finances, they may contribute to growth and employment in the 
medium  to  long  term,  and  in  turn  to  the  sustainability  of  public  finances.  Social 
security  contributions  exemptions  and  rebates  contributed  to  the  persistent  general 
government  deficit,  but  to  some  extent  supported  social  cohesion  by  targeting  lower 
income earners, less qualified workers and new permanent contracts. The tax reforms 
adopted in late 2014, while being under-funded, are aimed at making the tax structure 
more growth-friendly as well as improving tax governance and equity.  

(14)  For 2016, the Spanish government, in its caretaker position, has taken deficit-reducing 
measures  following  the  Commission  Recommendation  of  9  March  2016  regarding 
measures to be taken by Spain in order to ensure a timely correction of  its excessive 
deficit,  which  is  welcome.  In  particular,  with  a  view  to  implementing  provisions  in 
domestic legislation to enforce fiscal discipline on regional governments, on 6 April, 
the  government  required  12  regional  governments  to  approve  cuts  in  budget 
appropriations  to  ensure  compliance  with  their  deficit  targets  for  2016.  While  the 
expenditure  cuts  for  2016  adopted  to  date  by  those  governments  are  considerably 
below the expected amount reported in the 2016 Stability Programme, Spain's central 
government has approved around 0.2% of GDP cuts to budgetary appropriations. On 
13 July, the Spanish caretaker government announced its commitment to put in place 
further  welcome  deficit-reducing  measures.  On  the  revenue  side,  amendments  to  the 
corporate income tax law, to be adopted as soon as a new government is formed, have 
been envisaged to make up for the loss in revenues of around 0.5% of GDP expected 
for 2016 following the changes made to the regulation of instalment payments (pagos 
fraccionados) of the corporate income tax, so as to ensure that corporate income tax 
revenues  reach  the  level  expected  in  the  2016  Stability  Programme.  On  the 
expenditure  side,  the  advancing  of  the  date  of  closure  of  the  central  government's 
fiscal  year,  adopted  on  14  July,  can  help  contain  expenditure  developments  in  the 
second  half  of  2016.  Nevertheless,  these  measures  are  still  subject  to  considerable 
implementation  risks, in particular with  respect to the timely adoption by Parliament 
of  required  changes  to  the  corporate  income  tax  law  and  whether  they  will  be 
sufficient  to  offset  the  expected  shortfall  in  corporate  income  tax  revenues.  The 
government has also committed to take further measures against tax fraud. 

(15)  Spain's reasoned request to the Commission also highlights the negative impact of low 
and  even  negative  inflation  on  the  fiscal  adjustment  process  and  the  economy  as  a 
whole.  As  also  argued  in  the  Council  Decision  of  12  July  2016,  over  2013-2015, 
Spanish inflation (as measured by the GDP deflator) was indeed well below that in the 
baseline  macroeconomic  scenario  underpinning  the  recommendation  (it  was  even 
negative  in  2014,  at  −0.4%).  However,  the  negative  impact  of  low  or  even  negative 
inflation  on  Spain's  fiscal  outcomes  was  largely  offset  by  higher-than-expected  real 
GDP growth. 

(16)  Spain also puts forward methodological issues concerning the alleged inability of the 
current effective action methodology to take account of negative inflation surprises or 
to  accurately  measure  potential  GDP  growth  in  the  case  of  Spain.  Concerning  the 

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possible underestimation of the structural effort carried out in Spain, it must be borne 
in  mind  that,  in  estimating  potential  growth,  the  Commission  applies  the  commonly 
agreed  production  function  methodology,  endorsed  by  the  Council.  As  regards  the 
impact the impact of negative inflation, the Commission acknowledges in its analytical 
work that the methodology agreed for fiscal surveillance – and based on the correction 
of  headline  balance  figures  by  means  of  potential  output  estimates  –  can,  in  the 
presence  of  a  negative  inflation  shock,  lead  to  the  underestimation  of  the  structural 
effort. However, this approach is complemented by a so-called bottom-up measure of 
the  fiscal  effort,  which  assesses  whether  expenditure  targets  have  been  met  and  the 
planned discretionary measures on the revenue side have been implemented. Contrary 
to  the  change  in  the  structural  balance,  this  bottom-up  measure  will  likely  be  over-
estimating the fiscal effort following a disinflation shock. In the case of Spain, also the 
use  of  such  bottom-up  methodology  shows  that  no  cumulated  effort  was  delivered 
over  2013-2015,  against  the  recommended  cumulative  structural  effort  of  3.0%  of 
GDP.  

In view of Spain's reasoned request and having regard of the previous points, notably 
the deep structural reforms undertaken by the Spanish government since 2012 and still 
in place, the challenging economic environment during the period covered by the June 
2013  Council  recommendation,  the  deficit-reducing  commitments  announced  by  the 
Spanish  caretaker  government  in  its  reasoned  request,  along  with  the  consolidation 
measures put in place following the Commission Recommendation of 9 March 2016 
regarding measures to be taken by Spain in order to ensure a timely correction of its 
excessive deficit, a cancellation of the fine of 0.2% of GDP is considered warranted. 

(17) 

HAS ADOPTED THIS DECISION:  

Article 1 

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

This decision is addressed to the Kingdom of Spain.  

Done at Brussels, 

Article 2 

For the Council 
The President 

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