Germany, Finland fear EU going soft on budget rules

BRUSSELS Fri Feb 28, 2014 3:46pm EST

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BRUSSELS Feb 28 (Reuters) - Germany and Finland say changes in the way the European Commission assesses an EU member's adherence to budget rules could weaken the bloc's pact on fiscal discipline, a document showed on Friday.

The 8-page document, obtained by Reuters, also called for independent monitoring of the EU executive's decisions.

The paper, authored by Germany but also endorsed by Finland, said the way the Commission now reaches its verdicts could weaken EU budget rules, known as the Stability and Growth Pact.

"The recent methodological changes imply the risk of watering down the newly strengthened Stability and Growth Pact at its implementation stage," the document said.

European Union countries sharpened their common budget rules in 2012 to avoid a repeat of the sovereign debt crisis, caused by excessive government borrowing.

The rules say that if a country runs a budget deficit higher than 3 percent of GDP, it is given a deadline by the European Commission and EU finance ministers to return to compliance.

Each year the Commission assesses if the rule-breaker is on track and whether EU ministers should let the country pass or not. If the member state slips for reasons beyond its control, the Commission and EU finance ministers can give it more time. If it has no such excuse, it can eventually be fined.

But it all depends on the Commission's view of what is and is not within the government's control and on estimates of what effects various fiscal measures will have, the paper said.

LACK OF TRANSPARENCY?

Because the Commission has shifted its focus to fiscal measures from actual outcomes, the consequences of missing targets have shifted from the individual government more to the whole euro zone, the document said.

It said the new methodology was not transparent because it made it impossible for anyone except the Commission to assess whether a country had met the requests of EU finance ministers.

Finally, the new methodology created strong incentives for governments to overestimate revenues from discretionary tax measures, a problem made worse by the fact that estimates of such revenues were unreliable or could not be verified.

The paper cited an assessment last year by the Commission as to whether Belgium, France, Spain, the Netherlands and Slovenia had taken the promised action to meet budget targets.

Even though France and Spain missed most of the targets set by EU finance ministers according to five criteria, the Commission still said they had taken effective action and gave them another two years to cut deficits below 3 percent of GDP.

Berlin and Helsinki said the methodology should be refocused on the actual structural budget balance and that the role of discretionary measures should be limited.

It must be possible to verify the assessment, which could be a job for an independent body, the paper said.

"To ensure data quality and full transparency of the Commission's assessment, the Commission proposals could be monitored by a separate pair of eyes while ensuring that all quantitative results can be fully replicated by outsiders.

"In this process, there could possibly be a role for the independent Chief Economic Analyst and/or national fiscal councils," the paper said.

European Commission spokesman Simon O'Connor said the methodology of the Commission's calculations was available on the internet and the EU executive was talking to EU governments to explain it further so that they can replicate the results.

The methodology changes had been in use for more than a year now and were a refinement to improve the assessment, he said.

"We believe that it allows for a more sophisticated and also fairer evaluation of member states' efforts to restore the sustainability of public finances," O'Connor said.

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