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EU eyes special role for investment in budget rules review

BRUSSELS (Reuters) - European Union budget rules should be amended to be more medium-term oriented and give special treatment to government spending that boosts economic growth potential, European Economics Commissioner Paolo Gentiloni said on Friday.

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In remarks to a European Fiscal Board conference, Gentiloni also said the rules should have a credible mechanism to cut debt gradually and to be suspended more easily in economic downturns when monetary policy has already limited room for manoeuvre.

The rules, called the Stability and Growth Pact, were agreed in 1997 as a way to coordinate independent fiscal policies in a monetary union where the same interest rates are set for all countries using the euro.

They have been revised three times since, making them more complex each time, and the European Commission is conducting a review now to simplify and focus them more on indicators that are directly under the control of governments.

“Special treatment for growth-enhancing expenditure is in my view needed,” Gentiloni said. “Our fiscal rules should be adapted to improve the composition of public finances and make sure that any new debt is good debt.”

Good debt, he said, was money borrowed to finance research, education, infrastructure, or health care, as opposed to paying for current expenditures with no impact on productive capacity, which he called bad debt.

The Commission is to prepare proposals on how the rules should be amended for discussion by EU finance ministers later this year.

“The current rules lack a sufficient medium-term focus. Yet the main goal of fiscal rules should be to prevent unsustainable public finance trajectories, which can only be achieved by focusing on the medium term,” Gentiloni said.

“While a strict debt rule could lead to a drastic, pro-cyclical and self-defeating adjustment, a credible mechanism to steer debt onto a gradual and steady downward trajectory remains warranted.”

The rules are suspended now so that governments can borrow and spend as much as they need to keep their economies float amid the coronavirus pandemic that has caused the deepest ever recession in the EU last year.

The suspension was made possible by a general escape clause built into the Stability and Growth Pact for deep economic crises such as the COVID-19 health crisis.

“We should have a reflection on whether there is a need to turn to the general escape clause more often in economic downturns, in order to account for the effective lower bound on monetary policy,” Gentiloni said.

“A single, more readily usable escape clause could be balanced by eliminating the multitude of exceptions that currently apply to the normal provisions of the Pact.”

Reporting by Jan Strupczewski; Editing by Mark Heinrich

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