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EU eyes longer, negotiated debt reduction paths in rules review

FILE PHOTO: European Union flags flutter outside the EU Commission headquarters in Brussels

By Jan Strupczewski

BRUSSELS (Reuters) - The European Commission will on Wednesday propose changes to the EU's debt rules that would allow each of the bloc's 27 countries to negotiate its own debt reduction path, the length of which would depend on reforms and investments, officials said.

Changes to the rules are necessary because, after the surge in public debt in European Union countries caused by the COVID-19 pandemic, existing debt reduction requirements have become unrealistically ambitious.

The current rule is that euro zone countries must cut debt every year by 1/20th of the excess above 60% of GDP - a tall order for Italy with debt of 148% of GDP or Greece with 186%.

Officials said that under the EU executive's proposals, instead of the current one-size-fits-all rule, each country would agree its own four-year debt reduction path with the Commission and get other EU finance ministers to sign off on it.

The four years could be extended to seven, if the extra time was justified by investment and reforms.

The inclusion of investment and reforms as a factor that could win governments more leeway has been an important factor for a group of countries led by France and Italy.

They argue that dealing with climate change, demographics or even boosting defence capabilities after Russia's invasion of Ukraine should merit special treatment in EU fiscal rules.

To better guide government spending there would be limits on primary expenditure, which is government spending before interest on debt. The more indebted a country is, the tougher the primary expenditure limit would be, officials said.

Governments would still have to keep budget deficits below 3% of GDP as now, and there would still be disciplinary steps if they exceed that ceiling, with fines for breaches that are smaller, but more easily applied, officials said.

Stronger enforcement of the rules has been one of the key demands of the so-called "frugal" camp of mostly northern European countries led by Germany, but officials say Berlin is still quite sceptical about the Commission's proposals.

Among the reasons for that is a long-standing mistrust between EU governments and institutions, officials said, where the Commission is seen by some capitals as too lenient in applying the laws of which it is the guardian.

In a reform of the EU rules in 2011, governments agreed to make fines for excessive deficits difficult to stop, once the Commission proposed them.

But despite its greater powers, the Commission never proposed any fines, even though it had straightforward cases when France, Spain or Portugal repeatedly broke agreed limits.

(Reporting by Jan Strupczewski; Editing by John Chalmers and Paul Simao)