EU to temporarily suspend bloc's budget rules

The “general escape clause” will now give countries a free hand in fighting the coronavirus

European Commission President Ursula von der Leyen

The European Commission agreed to suspend EU budget rules that limit borrowing, giving hardest-hit Italy and other governments free rein to "inject spending into the economy as needed" in order to fight the coronavirus. The so-called
‘general escape clause’ was proposed late on Friday among other rules to respond to the pandemic, which has triggered lockdowns in most EU countries and the closure of Europe’s borders.

“It will allow Member States to undertake measures to deal adequately with the crisis, while departing from the budgetary requirements that would normally apply under the European fiscal framework,” the Commission said.

Under EU rules, governments have to keep cutting their budget deficits until they reach balance or surplus, and have to reduce their public debt/GDP ratio every year until it is at or below 60% of GDP. But with the new temporary measure government spending to fight the coronavirus will be excluded from Commission calculations of deficit and debt. The announcement is to be welcomed in Italy, which has not only been the country suffering most from the novel coronavirus, but also the one that has been struggling to reduce its huge debt of 137% of GDP due to sluggish economic growth and additional spending to offset the effects of the epidemic would have normally drawn a rebuke by the Commision.

“The Italian government will be able to put as much money into the economy as needed. Normal budget rules, debt rules for example, will not be applied at this stage,” Commission head Ursula von der Leyen was quoted as telling Il Corriere della Sera paper.

However, the Commission proposal needs to be formally accepted by EU finance ministers at their next meeting first. 

EU finance ministers, who have ultimate control of EU rules that limit government borrowing, agreed on 5 March that the economic impact of the virus was an emergency and an event outside their control, meaning EU budget rules should not apply. They repeated that message on Monday, agreeing that the rules will not stand in the way of responding to the pandemic, which the Commission expects to cause a 1.0%-2.5% recession in Europe this year.

Meanwhile, the European Commission has also said it's ready to consider backing common debt issuance in the eurozone to help the bloc weather the massive economic impact of the coronavirus outbreak.

"We are looking at all instruments and whatever helps will be used," Von der Leyen told German radio Deutschlandfunk.

"This also applies to coronabonds - if they help and if they are correctly structured, they will be used," she added.

The comments from the Commission president, a member of Chancellor Angela Merkel's conservatives in Germany, which has long resisted pooling debt with heavily indebted European Union members such as Italy, suggest consensus is now building for such a step. The special "coronavirus bonds", or a European guarantee fund, was called for by Prime Minister Giuseppe Conte of Italy to help EU states finance health spending and economic rescue programmes.

More on this subject: Coronavirus

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