EU begins rethinking fiscal rules as economy slows

Reuters | Sep 11, 2019 at 6:00 AM

* Bloc's economy is slowing down

* Many questioning rationale of budget regulations

* Italy's Gentiloni nominated EU economy commissioner

BRUSSELS, Sept 10 (Reuters) - The European Union is bracing for a review of its strict fiscal rules as the bloc's economy slows, while monetary stimulus is seen as being close to its limits, according to an EU document and officials.

The periodic assessment is dictated by EU rules but it comes at a time when many are questioning the rationale of budget regulations, known as the Stability and Growth Pact, that were speedily overhauled in the wake of Europe's 2010-2012 debt crisis.

"While the original rules had the sole objective of ensuring sound and sustainable government finances, increasing emphasis is being placed by some on the role of fiscal policy in economic stabilisation," says a document prepared by the Finnish presidency of the EU.

Separately, on Tuesday the president-designate of the EU Commission, Ursula von der Leyen, assigned the economic portfolio in the new executive to Italy's leftist former prime minister Paolo Gentiloni, in a move seen by some observers as a step towards fiscal loosening.

The Finnish internal document, dated Sept. 9 and reviewed by Reuters, will orientate a debate on the reform of fiscal rules which EU finance ministers will hold in Helsinki on Saturday, according to the meeting's agenda.

Finland, which has traditionally supported a rigid interpretation of the stability pact, conceded in the document that the role of the euro zone's fiscal policy to support the economy is increasingly seen as crucial, also because monetary policy is perceived "as more and more constrained".

Years of European Central Bank's negative rates and monetary stimulus have dispelled immediate risks for the euro zone's very survival, but have failed to sufficiently raise inflation and growth in the bloc.

Under existing provisions, the EU executive commission is required to re-assess its fiscal rules by the end of this year. It refrained from recommending an overhaul after its first review in 2014, but at that time rules had not been properly tested.

The outcome may be different now as Germany, the bloc's traditional economic motor, is on the brink of recession with officials in Berlin openly suggesting they could pump money into the economy to counter any significant slowdown.

BALANCING ACT

On Monday, Reuters reported that Germany is considering setting up independent public agencies that could take on new debt to invest in the country's flagging economy, without falling foul of strict national spending rules.

Italy's Prime Minister Giuseppe Conte repeated on Tuesday Rome will seek a reform of fiscal rules to promote growth.

Last year, the European Fiscal Board, an EU body that advises on budget rules, said fiscal regulations that require euro zone states to keep deficits below 3% of output and gradually bring debts below 60% were too complex.

It proposed that countries which maintain their primary expenditure below a set ceiling over a three-year period - and therefore are set to lower their debt - could be considered in line with EU rules even if they run excess deficits.

Commission officials confirmed the timeline for the review but do not comment on its possible outcomes, as the new executive is still waiting the vetting of EU lawmakers before beginning its mandate in November.

The Finnish document also makes clear that EU countries are still divided over the assessment of existing rules.

Appointments of top economic commissioners unveiled on Tuesday confirmed this interlocutory approach.

Gentiloni's appointment came as a surprise to those who seek more fiscal discipline, as contrasts over budget rules with Rome have loomed large during the five-year mandate of the outgoing commission.

"The fact that an Italian is put in charge of fiscal surveillance of Italy's budgetary mess is less than ideal," said Markus Ferber, a German centre-right lawmaker which sits in the economic committee of the EU parliament.

But in a carefully thought balancing act, von der Leyen has however confirmed at the helm of the executive's economic policy former Latvian Prime Minister Valdis Dombrovskis, who has a reputation as a tough enforcer of fiscal discipline.