June 10, 2014 / 8:30 AM / 5 years ago

EU should simplify budget rules, focus on debt-to-GDP - IMF

BRUSSELS, June 10 (Reuters) - The European Union should simplify its complex budget rules and focus mainly on the debt-to-GDP ratio, the head of the International Monetary Fund’s European department Reza Moghadam said on Tuesday.

Four years of the sovereign debt crisis started in 2010 have increased the debt-to-GDP ratio in the 18 countries using the euro by 30 percentage points to well above 90 percent, making debt sustainability one of the main headaches for governments.

The 28-nation EU should also review how to better enforce the rules, Moghadam told the an economic conference in Brussels.

“Simplification should be a priority,” he said in a prepared speech.

EU countries now have to keep their nominal budget deficits below 3 percent of GDP, they have a spending benchmark, various deficit targets set under an EU budget disciplinary procedure and various targets for the budget’s structural balance and how it should change.

“The labyrinth of rules is difficult to communicate to the public, and the number of rules needs to be cut down. Debt dynamics, i.e., the evolution of the debt-GDP ratio, should be the single fiscal anchor, and a measure of the structural balance the single operational target,” Moghadam said.

He also noted that the EU should strengthen the mechanisms for enforcement of the rules.

“Compliance with fiscal targets in Europe has been low since the late 1990s, reflecting weak incentives. Enforcement mechanisms in Europe are not as strong as in other federations,” he said.

“Sanctions typically take the form of deposits subject to loss, like posting a bond. But the conditions to convert these deposits into outright fines are very strict and so far have never been applied. The corrective actions required in case of non-compliance are also relatively weak, reflecting the inability of the centre to impose direct controls on national budgets,” Moghadam said.

“There are no easy solutions here, especially in a framework founded on peer pressure and moral suasion. More automaticity in enforcement could help: if sanctions cannot be avoided ex post, then they are likely to be more effective ex ante,” he said. (Reporting By Jan Strupczewski)

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