By Jan Strupczewski

BRUSSELS (Reuters), – After the COVID pandemic, the European Union must seek to reform its budget rules. It should not be readjusting the current framework.

EFB, an advisory body of the European Commission is expected to prepare next year its first proposals for reforming EU budget rules. These will help to protect the currency by restricting government borrowing.

These rules, which were established 1997, have been temporarily suspended in order to combat the pandemic. But, it is necessary to make changes as the public debt has risen sharply across Europe due to the crisis.

Even though investment is required to fight climate change, the rules don’t provide any specific treatment. However, the Commission estimates that there will be 650 billion euros (or 752 billion) annually in the EU over the next ten year.

The report stated that the EFB believes that genuine fiscal reform is more effective than any alternative to discretionary or hard-to-predict adjustments in the implementation the existing rulebook.

Now, the rules limit government deficits to 3 percent of GDP while public debt is limited to 60%. Higher levels of debt, such as in many EU countries, must be reduced by 1/20th the amount above 60% annually. This is too ambitious for most.

According to the EFB, “Our proposal revolves about one primary goal: a sustainable credit dynamics; one major policy instrument: an expense benchmark; and one exemption clause that can be invoked based on independent economic analyses.”

According to the board’s recommendations, reform should preserve the 3% deficit limit but emphasize the importance of the expenditure benchmark. This rule states that governments can spend more when growth is less than potential or less if growth is higher.

EFB stated that the pace of debt reduction should be adjusted to specific country conditions, and not set in a blanket manner for everyone.

EFB proposes the establishment of a budget (called a central fiscal ability) to address the investment needs. It will be used to protect, promote, stabilize and protect public investment rather than exclude it from deficiency calculations.

The rules must include an escape clause to deal with extreme shocks that may occur when they are suspended.