The European Commission and the 12-nation euro zone were facing a major test of their commitment to balanced state finances today after Portugal acknowledged it had vastly overshot an agreed public deficit limit.
The Commission, the executive arm of the European Union, announced late yesterday it would launch a sanctions procedure against Portugal after Finance Minister Mr Manuela Ferreira Leite revealed in Lisbon that the country's public deficit came to 4.1 per cent of output last year.
As a member of the euro zone, linking those EU members using the euro as currency, Portugal is bound to hold its public deficit - which encompasses central and local government spending along with certain social welfare mechanisms - under three per cent of gross domestic product (GDP).
Portugal thus becomes the first euro-zone nation to face a real sanctions threat since the establishment of European monetary union in January 1999.
If the sanctions procedure - which is likely to be long and complicated - runs its full course, Portugal would face a fine of 270 million euros as well as the loss of hundreds of millions of euros' worth of EU financial transfers.
But most analysts here say it is far from certain that Lisbon will actually be punished.
A spokesman for EU economic commissioner Mr Pedro Solbes said Thursday that the goal of any sanctions procedure would in effect be to convince Portugal to put its public finances in order rather than to impose fines.
AFP