Euro Area: European Commission suspends budget rules in fight against coronavirus

Euro Area Politics March 2020

Euro Area: European Commission suspends budget rules in fight against coronavirus

On 20 March, the European Commission (EC) suspended the Stability and Growth Pact—a set of fiscal rules designed to prevent Eurozone countries spending beyond their means—in order to allow government budget deficits to temporarily exceed the 3.0%-of-GDP limit without triggering an excessive deficit procedure. As part of efforts to shield their economies from the severe economic fallout from the coronavirus (Covid-19) pandemic, all Eurozone governments have adopted a combination of additional financing for their health care systems; measures to sustain wages and incomes; liquidity support for businesses; and public guarantee schemes for bank loans to companies. The European Commission decision thus allows governments to inject liquidity into their economies to battle the coronavirus pandemic free of EC oversight.

In addition to triggering the “general escape clause”, the Commission loosened the enforcement of state aid rules, therefore allowing governments to provide subsidies to those companies most severely affected by the current crisis. Moreover, the European Council freed up EUR 37 billion of cohesion funds to boost liquidity for small- and medium-sized enterprises (SMEs), support health services and tackle the effects of the coronavirus outbreak. On top of that, the European Investment Bank will provide up to EUR 40 billion in guarantee schemes, liquidity lines and asset-backed securities purchasing programs to support crisis-hit SMEs. These actions add to the ECB’s decision to ramp up its monetary stimulus plan, which is now set to buy over EUR 1 trillion of Eurozone debt by the end of this year, thus keeping government borrowing costs in check and allowing countries to boost fiscal spending.

Commenting on the variety of measures adopted by the EU institutions, Bert Colijn and Carsten Brzeski, economists at ING, added:

“To some, the EU response has been a disappointment and no, we have not yet seen a Corona-bond introduced or a large Marshall Plan kicked off […]. Still, the activation of the general escape clause, the ECBs introduction of dual interest rates and committing to no limits in using asset purchases are all unprecedented moves to battle this crisis by EU institutions. In a relatively short amount of time, the EU has paved the way for governments to do what’s necessary.”

Fiscal and monetary measures can only alleviate the worst consequences and the ongoing coronavirus outbreak, which is set to severely hit economic activity this year by disrupting supply chain, hitting tourist flows and dampening both domestic and external demand. In addition, the pandemic could exacerbate the fragilities of banking systems which are already burdened by a high stock of bad loans as well as strain debt sustainability in countries with heavy public-debt-to GDP ratios.

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