Limits on overspending by EU governments should remain suspended until the end of 2022 as the coronavirus pandemic is still choking the economy, the European Commission recommended on Wednesday.

The EU executive suspended the public spending rules for national governments a year ago as the European Union sank into its deepest recession since World War II.

This has allowed countries to open the money taps to rescue their economies and help companies survive the pandemic.

Video: AFP

EU Executive vice president Valdis Dombrovskis said that, based on current projections, the reprieve should "remain active in 2022 and be deactivated in 2023" when Europe's economy should have returned to pre-crisis health.

The idea will have to be approved by the EU member states and the commission could face hard questions from the so-called Frugals - richer members such as the Netherlands and Denmark - that are wary of allowing big spending to continue longer than necessary.

Paolo Gentiloni, the EU's commissioner for the economy, argued that the pandemic was still inflicting pain on Europe's economy and that "for 2022, it is clear that fiscal support will still be necessary."

"Better to err towards doing too much rather than too little," Gentiloni, a former Italian prime minister, added.

Known as the Stability and Growth Pact, the rules limit deficit spending at 3% of the overall economy and debt at 60%.

The rules are often violated and countries in theory risk penalties for ignoring them, though no government has ever been sanctioned.

The limit on debt especially is overshot by several countries, with Italy's, for example, soaring to a staggering 155.6% of the economy.

Instead, the pact mainly empowers the EU executive and fellow member states to keep a careful eye on how national governments run their budgets.

The commission, with the backing of the member states, also signals what reforms need to be carried out in order to get a thumbs up from the EU.

Given how long it will take for some member states to overcome the Covid crisis, "this proposal makes perfect sense," said Fritzi Köhler-Geib, chief economist at the German public bank KfW.

However, given the towering debt levels in some countries, "strategies that credibly reduce debt levels to a sustainable level in the long term are crucial."

Change the rules

The fiscal rules are however quite controversial, with member states complaining that they are ineffective and outdated. 

There are also big arguments over the actual danger of running a high debt when the financial markets seem to be unbothered by the public debt piles in countries like Italy, France or Belgium.

The EU-27 are committed to reforming the pact, with some hopeful that this will be done before the old system is put back into place. 

The Covid crisis has only "reinforced the case for reviewing our fiscal rulebook," said Gentiloni, adding that work on changing the rules will hopefully start this year.

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