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BRUSSELS (Reuters) - The European Commission said on Wednesday it will not suspend EU funds for Spain and Portugal next year following their breach of EU budget rules, as it also called for looser fiscal policy across the euro zone.
The European Union's executive Commission has the power to impose fines and to suspend EU funds for countries that run deficits above 3 percent of their gross domestic product and do not take measures to correct their excessive gaps.
Spain and Portugal were found in breach of EU fiscal rules last year, but the Commission has concluded there is no need to sanction them as they have taken sufficient measures to correct their imbalances, Commission vice president Valdis Dombrovskis told a news conference.
"The event that required a proposal by the Commission to suspend parts of the European Structural and Investment Funds is no longer present and there will be no such proposal," the EU executive said in a note, adding that the sanction procedure will be "held in abeyance".
The move follows a similar decision over the summer, when the EU agreed not to impose fines on Spain and Portugal as part of the sanction procedure triggered by their excessive deficits and the lack of timely corrections to the fiscal gaps.
The decision on Spain and Portugal came alongside a Commission proposal to loosen fiscal policy next year to spur the sluggish euro zone economy. That marks a more decided move towards an expansionary policy after years of austerity and in the face of growing euroscepticism across the continent.
"The Commission considers that there is a case for a significantly more positive fiscal stance for the euro area," it said in a statement, adding that a fiscal easing would support the European Central Bank's ultra-loose monetary policy.
Citing significant unused capacity in labour and capital and high uncertainty, it said that a euro-area-wide fiscal expansion of up to 0.5 percent of GDP was desirable for 2017.
The 2014-2020 EU budget foresees an overall commitment to Spain of more than 5 billion euros in EU funds a year, and about 3.5 billion for Portugal.
Under the sanction procedure, some of the funds could have been suspended next year, dealing a hard blow to the economies of the two countries which are highly reliant on EU aid.
Reporting by Francesco Guarascio; Editing by Philip Blenkinsop and Catherine Evans