EU should seek genuine budget rules reform, not just tweaks -EFB

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FILE PHOTO: EU flags flutter in front of the European Commission headquarters in Brussels

By Jan Strupczewski

BRUSSELS – The European Union should seek genuine reform of its budget rules after the COVID pandemic rather than small tweaks to the existing framework, the European Fiscal Board (EFB) said in its annual report on Wednesday.

The EFB is an advisory body to the European Commission, which next year will prepare its first proposals on how to reform EU budget rules that safeguard the value of the euro by limiting government borrowing.

The rules, established in 1997, have been suspended to fight the pandemic, but they need changes because the health emergency has sharply boosted public debt levels across Europe and most countries are unable to reduce debt at the pace now required.

The rules also do not envisage any special treatment for investment, even though the EU fight against climate change will require, according to the Commission, 650 billion euros ($752 billion) of investment annually over the next 10 years.

“The EFB is convinced that a genuine reform of the fiscal framework is better than a possible alternative of discretionary and hard-to-predict tweaks in the implementation of the existing rule book,” the report said.

The rules now set limits on government deficits at 3% of GDP and on public debt at 60% of GDP. If debt is higher, as is the case in most EU countries, it must be cut by 1/20th of the excess above 60% each year – too ambitious a goal for most.

“Our proposal revolves around one primary objective: a sustainable debt dynamics; one main policy instrument: an expenditure benchmark; and one escape clause to be invoked on the basis of independent economic analysis,” the EFB said.

The board said the reform of the rules should keep the 3% deficit limit, but emphasise the role of the expenditure benchmark – a rule that says a government can spend more when economic growth is below potential and less if above.

The pace of debt reduction would best be fine-tuned to individual country circumstances, rather than set as one blanket rule for all, the EFB said.

To address investment needs, the EFB proposed the creation of a budget, called a central fiscal capacity, to stabilise, protect and promote public investment, rather than exempting investment from deficit calculations as proposed by some.

Finally the rules should have an escape clause for exceptional shocks when the rules need to be suspended.

(Reporting by Jan Strupczewski; Editing by Nick Macfie)