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U.S. Markets

Top French economists call for EU's 3% deficit rule to be dropped

PARIS (Reuters) - A trio of top French economists called on Tuesday for the European Union’s fiscal rules to be revised to focus on countries’ debt burdens, abandoning a much-violated rule on public deficits.

A revision of the rules, widely seen as overly complex following previous revisions, had just got under way last year when they were suspended at the start of the pandemic to let countries mobilise their public finances for fighting the outbreak and supporting their economies through the crisis.

Even before the crisis, the rules, called the Stability and Growth Pact, were frequently broken by member countries, including France, which for a decade flaunted the cornerstone rule requiring countries to keep their public budget deficits to less than 3% of gross domestic product.

Economists Philippe Martin, Jean Pisani-Ferry and Xavier Ragot said in a policy paper that the 3% cap, along with a rule requiring governments to work towards keeping debt to 60% of GDP, are obsolete and the deficit cap could even spur dangerously unnecessary budget rigour after the crisis.

Instead the Stability and Growth Pact should focus on the sustainability of each countries’ debt burden by requiring governments to set a five-year debt target subject to review by an independent national fiscal authority and the European Union, the economists said.

To keep the public finances on track towards the target, countries would also have to set a spending cap tied to their potential economic growth rate, they proposed.

Philippe Martin heads the Council of Economic Analysis, an independent body directly attached to the prime minister’s office, Jean Pisani-Ferry is a long-time think tanker who helped President Emmanuel Macron set his economic programme and Xavier Ragot heads the OFCE economics think tank in Paris.

Their proposals may meet push-back from countries such as Germany and the Netherlands that have long argued in favour of strict rules to prevent profligacy that may threaten broader European economic stability.

Reporting by Leigh Thomas, Editing by William Maclean

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