BRUSSELS (Reuters). The European Central Bank suggested that the European Union change its fiscal rules so they are more favorable to growth and investment in the fight against climate change, digitalisation and debt reduction.

In a letter, the ECB stated that the EU’s fiscal rules (called the Stability and Growth Pact, or SGP) should be made simpler, clearer, and more predictable.

The central bank stated that it would be beneficial if the rules were simpler and less dependent on unobservable output gaps. This could be achieved by focusing more on expenditure-based rules, rather than relying on real-time annual estimates.

The government can spend more when it is not possible to do so. However, the expenditure rule allows for higher spending when there is less economic growth.

“The Governing Board also believes that a steady, gradual, and sustainable adjustment of the public debt is necessary to build fiscal space before any further downturns. The SGP’s debt rule would need to be reformed to guide such an adjustment,” the ECB said.

Current rule demands that governments reduce public debt to 1/20th the excess of 60% GDP each year. This is unrealistic for many countries in the eurozone after an increase in borrowings during the pandemic.

According to the bank, “The Governing Board agrees that fiscal policies should be more growth-friendly.”

The government and private sectors will need to invest significant amounts of money in order to address the digital and green transitions. A sustained, nationally funded investment in this area will be required. It will need additional income sources and a reprioritization of spending, particularly for countries that have high levels of debt.” it stated.

The ECB stressed the importance of completing the EU’s banking union. They agreed to a paneuropean deposit insurance program and a capital markets union which would provide companies with better capital access from the bloc’s more diverse sources.

The ECB mentioned that a budget for the euro area was needed. This controversial idea has been met with considerable resistance by Germany and the Netherlands.