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 like 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 and imposed bold economic adjustment targets on member states, triggering 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," ECA said.
The auditors, who have a mandate to protect the financial interests of the 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.
Under EU fiscal rules, states have to aim to reach a balanced structural budget, keep a deficit below 3 percent of their gross domestic product and a 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.
"Particularly worrisome is very slow, or even absent adjustment in several member states with high public debt ratio," 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 revamp its sluggish economic growth.
As a consequence its debt has remained high.