BRUSSELS, Sept 17 (Reuters) - All European Union countries under surveillance for exceeding budget deficit limits should be given an extra year to meet their goals, Bruegel, an influential think-tank whose proposals often inform EU policy, said in a paper on Monday.
Extra time would allow the countries to better balance the need for economic growth with the demands of austerity and so regain market confidence after almost three years of the sovereign debt crisis, Bruegel said.
Of the EU's 27 countries, 21 are under what is known as the excessive deficit procedure, which means they face disciplinary action and potentially fines if they fail to bring their budget deficits below 3 percent of gross domestic product in time.
Most have to reach the goal by 2013, while several have a 2012 deadline and others a 2014 or 2015 target.
Among the 17 countries that make up the euro zone, 13 are under such procedure and two -- Spain and Portugal -- have already been granted one-year extensions because of their weak economic growth.
"A one-year extension to the deadline for deficit correction may be granted in case of negative growth in the EU, or in specific countries," Bruegel scholars Benedicta Marzinotto and Andre Sapir wrote in the policy brief.
"For 2012, given the general economic situation, the one-year extension should be granted to all countries before they finalise their budgets for 2013," said the paper.
Bruegel, set up in 2005, is widely regarded as the most influential EU think-tank dealing with economic issues and has been ranked as the world's third most prominent think-tank.
Its economists and policy experts are frequently invited to brief EU officials and provide input to policy debates.
In their paper, the Bruegel economists said a decision to extend the deadline had to be taken promptly.
"Thereafter, it is only important that the decision is taken earlier than normal, ideally at the beginning of April, and that it is mostly in the hands of the Commission, as are other steps in the Excessive Deficit Procedure," they said.
The EU substantially toughened its budget rules late last year to include swifter financial sanctions against countries which spend too much. The so-called "six-pack" rules are designed to prevent another sovereign debt crisis.
But the huge austerity effort across the euro zone, meant to regain market confidence in public finances, is one of the main factors behind a sharp economic slowdown across Europe, which is likely to become a recession later this year.
"The strengthening of the European Union's fiscal rules... and the parallel worsening of economic conditions in Europe, re-opened the debate about the relationship between fiscal discipline and growth," Bruegel said.
"Influential voices have argued against the EU's perceived obsession with fiscal discipline, which risks being self-defeating in bad times," it said.