Portugal faces EU budget sanctions

Portugal's budget deficit 'must be reduced'

The European Commission has said it will initiate a sanctions procedure against Portugal after the country's budget deficit rose to 4.1% of its output in 2001.

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% of gross domestic product (GDP).

The Commission's sanctions procedure will start just months after a formal warning was issued when Portugal appeared close to breaching the eurozone's pact.

The warning was followed by a compromise which allowed Portugal more time to get back into line after it promised to reduce its deficit and come close to a balanced budget by 2004.

First time

The Commission's sanctions have never been used before under the terms of the pact.

In fact, the Commission is loath to use it unless it has to.

Earlier this month, moves were made in Brussels to relax budget rules to give member countries more freedom to fuel economic growth with public investment.

A proposal, due this autumn, is set to outline common standards for economic policy which should

• preserve macroeconomic stability
• raise the economic growth potential
• cope with economic shocks

The move is seen as a response to criticism from several European Union member states which have been angered by what they see as the Commission's meddling with their national spending plans.

"The concept of the excessive deficit procedure does not exist to penalise people, but to prevent problems," said Commission spokesman, Gerassimos Thomas.

Sanctions procedure

Under the Commission's Excessive Deficit Procedure, a report about 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".

If this is not done, sanctions could be imposed.