Euro zone ministers say EU fiscal rules flexible, no need to change

LUXEMBOURG, June 19 Thu Jun 19, 2014 2:47pm EDT

LUXEMBOURG, June 19 (Reuters) - The European Union fiscal rules can accommodate efforts to stimulate economic growth, so there is no need to change them, EU finance ministers and policymakers said on Thursday.

The ministers laid out their positions as they gathered for their monthly meeting, addressing a subject Italy had brought to the fore when it said earlier this year it wanted EU policies to better support growth.

"The existing rules provide enough flexibility," German Finance Minister Wolfgang Schaeuble said on entering the meeting. "We don't need to change the rules, we have to stick to them," he said. "Solid financing and structural reforms are two necessary conditions for sustainable growth."

The fiscal rules, called the Stability and Growth Pact, limit government deficits to 3 percent of gross domestic product and public debt to 60 percent of GDP. The pact also spells out how governments have to put their finances in order if they exceed the limits and when they can be granted leeway.

Italy takes over the rotating six-month presidency of the European Union in July and will set its agenda during that time. It had said earlier it wanted to take a closer look at the pact, starting a discussion on whether the rules should be changed.

But euro zone officials appeared to agree unanimously on Thursday that no change was necessary.

EU Economic and Monetary Affairs Commissioner Olli Rehn said the rules had "a significant degree of smart flexibility built in." Other finance ministers backed that view.

"Spain is in favour of not continually changing the rules," Spanish Economy Minister Luis de Guindos told reporters. "It is fundamental that there are stable, predictable and sensible rules and I think that right now, that's what we have."

The existing rules allow for slower budget consolidation if a country makes public investments or undertakes structural reforms. But many policy-makers worry that granting more time for deficit cuts may not bring about the desired effects.

Their concerns were sparked by France, which in exchange for reform promises was given two extra years, until the end of 2015, to bring its budget deficit below the EU limit of 3 percent of GDP. The reforms did not occur and France will struggle to meet even the extended deadline.

EU policy-makers are therefore thinking of reversing the order: first a country implements reforms, then the EU grants it more time on deficit reduction.

French Finance Minister Michel Sapin told reporters the country was not pleading for a change of the rules or more time to meet the targets. But he hinted that more flexibility could be needed, within the current rules.

"We are not asking for the rules to be changed," Sapin said. "But we need to find the right rhythm for each of the member states, especially those facing more difficulties, so that the return to a good budgetary situation, to an orderly decrease of debt and the reduction of deficit take place in a way that is compatible with growth and the return to growth," he said.

The issue of slower consolidation in exchange for reforms has become a bargaining chip in talks on who should become the new head of the EU executive arm, the European Commission. Italy is withholding its support for leading candidate Jean-Claude Juncker, seeking a more pro-growth interpretation of the rules.

There seems to be little opposition to using the leeway in EU budget rules even from Germany, long the most ardent defender of budget austerity. Earlier this week, German Deputy Chancellor Sigmar Gabriel suggested euro zone countries that carry out reforms should get more time to meet their fiscal goals.

He noted that Germany - now the growth engine of the euro zone - took time to meet deficit targets when it was carrying out reforms of its own. But the German government has since made clear that Gabriel did not imply a need to change the rules. (Additional reporting by Martin Santa and Tom Koerkemeier; writing by Annika Breidthardt; Editing by Larry King)

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