EU should seek real reform of budget rules, not just adjustments – EFB Reuters

Author: Jan Strupczewski

BRUSSELS (Reuters) – The European Union should seek real reform of its budget rules after the COVID pandemic, instead of making minor changes to the existing framework, the European Public Prosecutor’s Office (EFB) said in its annual report on Wednesday.

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

The rules established in 1997 have been suspended to deal with the pandemic, but they need changes because health emergencies have significantly increased the level of public debt across Europe and most countries are unable to reduce debt at the rate now required.

The rules also do not provide for special treatment for investments, although the EU’s fight against climate change, according to the Commission, will require an annual investment of € 650 billion ($ 752 billion) over the next 10 years.

“The EFB is convinced that a real reform of the fiscal framework is better than a discretionary and difficult-to-predict alternative to the implementation of the existing rulebook,” the report said.

The rules now set limits on 3% of GDP in government deficits and 60% of public debt in GDP. If the debt is higher, as is the case in most EU countries, it should be cut by 1/20 of the surplus of more than 60% a year – too much of a target for most.

“Our proposal revolves around a key goal: a sustainable debt dynamic; a key policy tool: an expenditure benchmark; and an escape clause based on independent economic analysis,” the EFB said.

The council said regulatory reform should keep the deficit limit at 3%, but stressed the role of the spending benchmark – a rule that says the government can spend more when economic growth is below potential and less so if it is higher.

The pace of debt reduction would be best suited to the situation of the individual country, rather than being established as a general rule for all, the EFB said.

To address investment needs, the EFB proposed the creation of a budget, called the central fiscal capacity, to stabilize, 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Finally, the rules should have an escape clause for exceptional shocks when the rules need to be repealed.