EU takes first step to overhaul its fiscal rules

By Jan Strupczewski

BRUSSELS (Reuters) - The European Commission took the first step on Wednesday to overhaul the fiscal rules that underpin the euro by launching a public consultation to help find common ground among deeply divided governments.

The complex and often shunned rules, called the Stability and Growth Pact, say EU governments should keep budget deficits below 3% of GDP and public debt below 60% of GDP.

A lax approach among some governments and outright cheating on statistics by Greece caused the sovereign debt crisis in 2010 that nearly destroyed the single currency.

It left the euro zone deeply divided, with the fiscally strict northern EU countries accusing the south of profligacy, and the south criticising what they see as the north's obsession with debt reduction.

"We're looking forward to an open discussion on what has worked, what has not, and how to build consensus for streamlining the rules and making them even more effective," Commission Vice President Valdis Dombrovskis said.

The Commission will gather feedback on what could be changed until the middle of the year and come up with proposals before the end of 2020, officials said.

The deficit and debt limits will stay, but the EU will seek to simplify rules and focus on metrics that governments control, such as spending in relation to GDP growth.

The rules now use items, such as the output gap, that are theoretical, often revised and not controlled by those in power.

The Commission also admits the current system does not give governments sufficient incentive to save in good times and promote investment.

The EU executive would also like to see changes that would support its ambitious Green Deal, giving governments more leeway for "green" spending. Some governments are against that.

Set up in 1997 to underpin the euro currency by limiting borrowing, the rules have undergone three revisions.

The first, in 2005, was brought on by Germany and France, who refused to accept disciplinary procedures against them.

The other two revisions came in 2011 and 2013 to calm financial markets shaken by the sovereign debt crisis. The changes gave the Commission wider powers to monitor and fine governments for irresponsible policies.

But despite clear-cut cases of rule-breaking by France, Portugal, Italy and Spain over the last five years, the Commission never sanctioned any of them.

EU officials privately say this primacy of politics over laws reduced the relevance of EU fiscal rules in policy-making of euro zone countries.

(Reporting by Jan Strupczewski; editing by Philip Blenkinsop)