Brussels proposes loosening budget rules for struggling EU economies

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Some EU governments could be given greater leeway to meet budget targets, the European Commission said in proposing a liberal interpretation of its rules to counter accusations that spending cuts are holding back the economy.

Although the Commission has already loosened targets for countries such as Spain, the additional tweak to its rules paves the way for gentler treatment of other states in future.

The budget rules, which Italy and France fought for to challenge German-led fiscal austerity, would allow countries with low debts and deficits to spend more on growth-friendly projects, rather than focus solely on deficit reduction.

Italy itself is unlikely to qualify because its debt is too high, as are other states at the forefront of the bloc's debt crisis, but it may benefit newer eastern members like Romania.

The Commission's head of economics and the euro, Olli Rehn, will make the proposal to EU finance ministers. Once agreed, it could be applied quickly.

"When assessing the national budgets for 2014 and the budgetary outcomes for 2013, we will … consider allowing temporary deviations from the structural deficit path," Commission President José Manuel Barroso told the European Parliament on Wednesday (3 July).

"Such a deviation must be linked to national expenditure on projects … with a positive, direct and verifiable long-term budgetary effect."

Budget cuts have been at the centre of the eurozone's strategy to overcome its three-year-long public debt crisis. But they are also blamed for a damaging cycle whereby governments cut back, companies lay off staff, Europeans buy less and young people have little or no hope of finding a job.

While the worst of the debt crisis may have passed, the conundrum leaders face is how to create jobs for millions of unemployed without undermining budget discipline.

The Commission has already granted countries such as France, Spain and Portugal more time to bring their budget deficits to below the 3% limit the EU says is necessary for economic stability and growth.

But it has also switched the focus away from deficits measured on an annual basis to those measured in so-called structural terms, which removes the effects of the business cycle and one-off measures on the budget.

The new rules would need to be approved on a case-by-case basis, partly because Germany, the leading stickler for fiscal discipline, is concerned that any straying from the path of deficit reduction will raise debt burdens and reignite financial market turmoil. 

The European Commission has set up a yearly cycle of economic policy coordination called the European Semester.

Each year it undertakes a detailed analysis of EU member states' programmes of economic and structural reforms and provides them with recommendations for the next 12-18 months.

The European semester starts when the Commission adopts its Annual Growth Survey, usually towards the end of the year, which sets out EU priorities for the coming year to boost growth and job creation.

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