Tighten EU debt rules, auditors tell Brussels

17 Jul 18

The European Commission should tighten up its rules for countries with high levels of debt before the next recession, auditors have warned.

In a report issued last week, the European Court of Auditors said that the bloc’s rules designed to enhance sound public finances, known as the Stability and Growth pact, give member states too much leeway.  

This is the second stage of an audit of the pact – established in 1997 then reformed in 2005 and 2011 – which set rules to ensure European Union countries have sound public finances and align their fiscal policies.

The first audit in 2016 looked at the “corrective arm”, which focuses on bringing the headline deficit below 3% of GDP.

This stage has examined the “preventative arm”, which requires member states to bring structural budget balances into line with country-specific targets known as medium-term objectives.

Neven Mates, the auditor responsible for the report, said: “The flexibility provisions introduced by the commission are not time-bound to the crisis period and in fact went too far in practice.

“As a result, in the period of recovery and expansion (2014-2018), structural balances in several highly indebted countries have either diverged from their medium-term objectives or converged to them at a slow pace so that substantial improvement ahead of the next recession is far from being assured.”

The report stated that “various flexibility clauses” granted by the Commission to member states with high debts, such as France, Spain and Italy, mean that they may not bring deficits down in a timely manner.

It said the Commission should ensure that the medium-term budget objectives are reached within a reasonable period, with stricter rules for heavily indebted states.

If a recession hits, the current approach “is likely to trigger financial market concerns” in view of the high debt-to-GDP ratio in some countries.

The current reform allowance – the permitted number of structural reforms, such as cutting the size of the public sector to reduce budgets – should be linked to the direct costs incurred by the reform process itself, the report added.

While it concluded that the bloc needed to strengthen the preventative arm to ensure it “harmonised” with the corrective arm of the pact, the Commission rejected the proposal, claiming the current framework is fit for purpose.

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