January 30, 2017 / 3:16 PM / a year ago

EU should provide incentives to observe EU budget rules - IMF

BRUSSELS (Reuters) - Government compliance with European Union rules underpinning the euro is poor despite several reforms and will not improve unless it is linked with political and financial incentives, the International Monetary Fund said.

In a paper entitled “Fiscal Policies in the Euro Area”, the IMF reviewed data on the application of the EU rules, which limit the size of government budget deficits and debt and set goals of balanced books in the 19 countries sharing the euro.

The data “reveals a poor record of compliance with the key rules in euro area countries over 1999-2015”, the paper said.

“If political incentives are not there, the most sophisticated revisions to the framework will not materially improve fiscal outcomes,” the IMF document said.

It said the EU should make sanctions for breaching the rules, which have never been applied despite some obvious cases of lack of compliance, more politically acceptable.

Under the rules, a country that breaks the budget deficit limit of 3 percent of gross domestic product and ignores EU calls to bring the shortfall down again, can eventually face fines of up to 0.2 percent of GDP.

The IMF said that fining a country already in fiscal trouble only made matters worse and said financial penalties should be applied before the limit was broken, when the EU takes action to prevent the breach of the ceiling in the first place.

“More emphasis should be placed on sanctions under the preventive arm, while non-pecuniary sanctions could also be considered under the corrective arm,” the IMF said.

The Fund said that, apart from penalties, the EU should also develop incentives for governments to stick to prudent fiscal policies, as was the case when European governments wanted to meet the criteria to join the euro currency and made efforts to put their fiscal house in order.

“One possibility involves linking the volume of structural funds and other EU subsidies to compliance with the rules,” the IMF said, referring to billions of euros that governments get from the EU budget for various national projects.

Also the creation of a specific euro zone budget and linking access to it to compliance with the rules could help.

The IMF’s suggestions come at a time when the European Commission is preparing ideas on how to take the currency union forward. The EU executive is to present its paper in March.

Reporting By Jan Strupczewski; editing by Philip Blenkinsop

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