EU too soft on fiscal rules, risks from high-debt states - auditors

By Francesco Guarascio

BRUSSELS (Reuters) - The European Commission has applied fiscal rules with excessive flexibility, making them ineffective in reducing debt in highly indebted states such as Italy, auditors said on Thursday, warning of risks of spillovers from negative market reactions.

To address widespread concerns over the future of the euro, the European Union, in moves led by Germany, tightened its fiscal rules during the peak of the bloc's debt crisis in 2010-2012. It imposed bold economic adjustment targets on member states, prompting criticism by many economists for the resulting austerity.

However, those rules were applied with excessive lenience by the Commission, the European Court of Auditors (ECA) said in a report on Thursday.

The European Commission has extensively used discretionary powers to reduce the adjustment requirements," the ECA said.

The auditors, who have a mandate to protect the financial interests of EU citizens, said this excessive flexibility prevented the fiscal targets from being reached "within a reasonable period" - a situation that could cause negative market reactions for the whole bloc in a possible future recession, they said.

The EU executive said it "strongly disagrees with the ECA's conclusion that the Commission used its discretion with a view to reducing adjustment requirements".

In replies included in the auditors' report, it added that it had exercised its powers in full respect of the EU legal framework.

The use of flexibility has been "proportional, appropriate and totally justified on economic grounds", the EU economics commissioner Pierre Moscovici told a news conference. He added that it was necessary to help the euro zone overcome the economic crisis.

Under EU fiscal rules, states have to aim to reach a balanced structural budget while keeping deficits below 3 percent of their gross domestic product and public debt below 60 percent. However, many have much higher and growing public debts.

"The flexibility provisions introduced by the Commission are not time-bound to the crisis period and in fact went too far in practice," said Neven Mates, the EU auditor responsible for the report and a former staff member of the International Monetary Fund.

Adjustment in several member states with high public debt ratios was very slow, or even absent, the report said, highlighting Italy, France and Spain.

Italy - which has a debt above 130 percent of its GDP, the EU's highest after bailed-out Greece - has benefited from several waivers from the rules in recent years, as more spending and investment was seen as useful to reviving its sluggish economic growth.

As a consequence its debt has remained high.

(Reporting by Francesco Guarascio; editing by John Stonestreet and David Stamp)