By Jan Strupczewski

BRUSSELS, (Reuters) – The European Commission has opened a discussion on Tuesday about how the European Union should reform its fiscal rules in order to address a surge of public debt due to a pandemic and the massive investment required to combat climate change.

Paolo Gentiloni, European Economic Commissioner, stated that “We are relaunching this review on our economic governance in the face of immense investment needs as the climate crisis becomes more severe with each passing year.”

The pandemic caused higher levels of debt due to the strong fiscal support. He said that these challenges made it more important to establish a transparent fiscal structure.

It is being debated whether to make a fourth change to the rules that were created in 1997 to restrict government borrowing, to preserve the Euro’s value. The so-called Stability & Growth Pact, which was revised in 2005 and 2011 respectively, is so complicated that very few people understand it.

The main problem is high public debt. This is because the average eurozone debt has risen to about 100% from 60%-70% during the 1990s, when rules were first drafted.

For countries with 160% GDP or higher like Italy, and more than 200% such as Greece, the annual debt reductions that are required under current laws simply isn’t feasible.

However, many EU finance ministers feel that the requirements for debt reduction are too stringent. There isn’t yet an agreement on how to address it. This could be through interpretation of laws or more complex changes.

Other challenges include ensuring that government rules are not tied to governments in a situation where the EU of 27 nations needs hundreds of billions to end net CO2 emission by 2050.

An analysis by the Bruegel think-tank for EU finance ministers in September showed additional public investment to meet the EU’s climate goals will have to be 0.5%-1.0% of GDP annually during this decade alone. Bruegel recommended exempting climate investment from EU deficit calculations.

Although the idea is supported by France, Spain and Italy, officials point out that it is difficult to define what “green” investments are.

According to the Commission, after reviewing all views and deciding what to do next, it will “provide guidance” for fiscal policy in the first quarter (2022) so governments are aware of the best rules for preparing long-term financial plans.