By Jan Strupczewski
BRUSSELS (Reuters) - The enforcement of European Union fiscal rules would improve if payouts from the EU budget relied on observing borrowing limits rather than the empty threat of sanctions, the European Fiscal Board (EFB) said.
The EFB, created in late 2015, is an independent advisor to the European Commission. It is to evaluate the implementation of EU budget rules under the bloc's Stability and Growth Pact (SGP), and suggest a common position on fiscal issues.
Euro zone finance ministers have openly criticised the complexity of the rules, policed by the executive Commission, and the lack of predictability of the Commission's decisions on disciplining governments who break them.
"The credibility and effectiveness of fiscal rules also hinges on their enforceability," the EFB said in its first ever report on Wednesday.
"Existing provisions on sanctions in the SGP turned out to be impracticable. A promising alternative to sanctions is to make wider and more effective use of conditionality in relation to the EU budget."
The EFB said that under this approach, a country would be eligible for EU funds if it abided by agreed policies or achieved certain results. If not, funds could be suspended.
But the approach could only be considered for the next EU long-term budget starting in 2021.
The EFB said the idea of linking access to EU money to observing EU rules would also help in talks on the future of EU finances, which involve the idea of a euro zone budget, known as a fiscal or stabilisation capacity.
The Board said that of the two most prominent proposals for such a centralised stabilisation capacity, a scheme to protect public investment during economic downturns and a EU unemployment reinsurance scheme, it preferred the former.
"(It) would be easier to implement both technically and politically," the Board said.
The head of the euro zone's bailout fund, Klaus Regling, has criticised the investment budget idea, arguing that the EU already had the European Investment Bank for that purpose and a special European Fund for Strategic Investments.
Regling also said that an investment support function for a euro zone budget would be useless because investment projects took too long to get going when an unexpected economic downturn happened.
(Reporting By Jan Strupczewski; editing by John Stonestreet)