Europe's Stability and Growth Pact should be changed so that it rewards sound fiscal policy instead of just punishing countries that go astray, an expert advising the European Commission said yesterday.
Mr Sylvester Eijffinger, who advised the Commission on the pact this summer, said the budget rules needed to be changed to solve a crisis sparked as the failure of the bloc's three biggest economies to cut their deficits in good times had left them with little room to manoeuvre during the current economic downturn.
He added that the Commission, the European Union's executive arm, should have more power to enforce budget discipline rules.
"What we have to learn from this crisis is that the pact isn't dead, but it does need to be revitalised," Mr Eijffinger said. "At the time the pact was drawn up, some things were not thought through well enough.
"But that's no problem because you can take out such flaws as you go along," added Mr Eijffinger, who is an economics professor in the Dutch city of Tilburg.
Some euro-zone governments who are having trouble keeping their deficit below the pact's cap of 3 per cent of gross domestic product have openly called for a reform of the rules.
Commission President Romano Prodi went even further when he recently brandished the pact as "rigid" and "stupid".
Governments should be rewarded for being disciplined in prosperous years, Mr Eijffinger said.
This could be done by allowing them to put money saved as a result of spending cuts into "rainy day funds" which could be used to offset falling income during bad economic times.
That would motivate countries to work towards the pact's goal of balancing their budgets in the medium term, rather than focusing solely on avoiding a breach of its deficit ceiling.
"[The pact now\] is all about sticks and not about carrots.
"Countries get no reward for behaving prudently in good times.. they could for instance create a separate ageing population fund which then counts for the deficit calculation," Mr Eijffinger said.
The EU starts a disciplinary process when a country's budget deficit tops the 3 per cent of GDP cap, and the ultimate sanction is a fine.
The pact, designed to underpin the single currency that 12 EU nations have adopted, was an essential building block to co-ordinate fiscal policy in the euro countries given the lack of political integration.
But it is in need of a revamp, according to the Dutch academic.
"We are at a crucial point in European history, as we roughly have been once every 10 years. I am confident that things will turn better, but it does mean we need to adapt the pact," said Mr Eijffinger, who is also member of a group of economic advisers to the European Parliament.
As an impartial actor, the Commission should have more power to start the disciplinary procedure, as it was unlikely that countries facing such punitive action would vote in favour of the steps that could lead to such fines, he said.
The EU executive has repeatedly said EU budget policing would be more credible and effective if it was given more power to enforce discipline and the right to issue recommendations directly to member-states.
Mr Eijffinger welcomed the idea of reducing the structural budget deficit - which is adjusted for economic cycle swings - by at least 0.5 of a percentage point a year.
The measure has been suggested by the Commission and backed by most euro-zone members.
But this meant accounting rules should be harmonised further, and the European Union's statistics bureau Eurostat should play a strong role in guaranteeing that, he added.
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/VR3765MFOBH2NMV2QNICYDF67M.png)