Portugal Faces EU Sanctions Over Budget Deficit

News that Portugal had breached the 3 percent budget deficit limit when its spending rose to 4.1 percent of its output in 2001 sparked EU officials to announce late Thursday that they plan sanctions against the country.

Excessive deficits could threaten the stability of the eurozone and in 1997, member countries agreed to a stability and growth pact in order to make sure the zone's economies keep in step with each other.

Under the pact, deficits should not rise above 3 percent of gross domestic product (GDP).

Portugal is the first country to be taken to task

This is the first time that the Commission's sanctions have been used under the terms of the pact.

Under the Commission's Excessive Deficit Procedure, a report detailing Portugal's deficit will be presented to the European Union's Economic and Financial Committee. Portugal will then be told by the Committee to "take effective action".

The country will then be expected to begin taking action within four months and the deficit brought into compliance within a year of the reported breach of the 3 percent ruling.

Sanctions would take the shape of hefty fines

If Portugal fails to comply, sanctions will be imposed. In this event, the stability pact calls for the offending country to pay a series of fines that could total up to 0.5 percent of its GDP.

However, if the European Commission perceives that the country is complying with its policy recommendations, it may suspend the sanctions and continuously monitor the situation until the deficits are at acceptable levels.

The decison to initiate sanction procedures comes just months after Portugal and Germany escaped the embarrassment of being reprimanded by the European Commission for spending too much money.

Previous action avoided by promises of change

The Commission's warning was followed by a compromise which allowed both countries more time to get back into line after they promised to reduce their deficits and come close to a balanced budget by 2004. The agreement to waive the warning relied on the assurances of Portugal and Germany that they would exercise extra vigilance in the future.

Portugal, it seems, has failed in its attempts at vigilence and has pushed the deficit higher and the Commission's patience to its limit.

Meanwhile, Germany's current budget deficit continues to hover just under the level set by the pact at 2.7 percent.