Commission lifts budget deficit rule to help economies cope with COVID-19 impact

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The European Commission has taken a historic decision on Friday. In a bid to dismantle all barriers in the fight against the novel coronavirus (COVID-19) and mitigate economic fallout, it is suspending its strict budget deficit rules for all member states. As of now, the governments may allocate resources to counter the economic impact of the global pandemic without considerations for the constraint of budget deficit rules.
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Extraordinary measure of huge magnitude

The Commission today proposes the activation of the general escape clause of the Stability and Growth Pact (SGP) as part of its strategy to respond quickly, forcefully and in a coordinated manner to the coronavirus pandemic. (The escape clause has never been activated since its addition to the SGP in 2011.) The escape clause will remain in effect for as long as necessary. 

What is the general escape clause?

The clause was introduced as part of the ‘Six-Pack' reform of the Stability and Growth Pact in 2011, which drew the lessons of the economic and financial crisis. Notably, that experience highlighted the need for specific provisions in the EU's fiscal rules to allow for a coordinated and orderly temporary deviation from the normal requirements for all Member States in a situation of generalised crisis caused by a severe economic downturn of the euro area or the EU as a whole.

Once endorsed by the Council, 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 proposal represents an important step in fulfilling the Commission's commitment

to use all economic policy tools at its disposal to support Member States' in protecting their citizens and mitigating the pandemic's severely negative socio-economic consequences.

President Ursula von der Leyen said: "Today we propose maximum flexibility for our rules which willallow our national governments to support everybody - their healthcare systems, staff as well as thepeople so severly affected by the crisis. I want to make sure that we respond to the human as well associo-economic dimension of the Coronavirus pandemic in the best way possible."

Commission ready to do even more

"The coronavirus pandemic is a major shock for the European and global economies. Member States have already adopted or are adopting budgetary measures to increase the capacity of their health systems and provide relief to those citizens and sectors that are particularly impacted. These measures, together with the fall in economic activity, will contribute to substantially higher budgetary deficits," said the EU executive. 

The Commission calls on the Council to endorse its proposal as quickly as possible.

The Commission stands ready to take further action as the situation evolves.

The fall in economic activity in 2020 could be comparable to the contraction of 2009, the worst year of the economic and financial crisis, the EC said. Member States are also faced with the mounting costs associated with effectively containing the pandemic while supporting the citizens and businesses that have been affected by the crisis.

Video message by the President of the Commission

In a video message, Von der Leyen has also talked about further measures to support the European economy in face of the coronavirus crisis.

The governments can now give money to the many companies that are hit by the sudden shock: hotels, restaurants, transport companies, small firms that risk closing down without support. [...] National governments can pump into the economy as much as they need. We are relaxing the budgetary rules to enable them to do that.

She also thank the "decisive action" taken by the European Central Bank (ECB) this week, which "adds to the firepower we need in Europe to prop up the economy."

The ECB’s Governing Council announced on Wednesday a new Pandemic Emergency Purchase Programme with an envelope of EUR 750 billion until the end of the year, in addition to the EUR 120 billion it decided on 12 March. Together this amounts to 7.3% of euro area GDP. The programme is temporary and designed to address the unprecedented situation our monetary union is facing. It is available to all jurisdictions and will remain in place until the ECB assesses that the coronavirus crisis phase is over.

The EU budget will make EUR 37 billion available to support the health care sector, companies and keep people in employment, she concluded.

Today's announcement also proves that the COVID-19 pandemic has kicked off dramatic times that require dramatic measures. One of the rules let go by the EC is to keep the shortfall of the state budget under 3.0% of GDP. Governments have already initiated their economic stimulus programmes even before today's decision. But now the EU practically told them: go ahead, spend as much as you need, and don't worry about your budget shortfall. The question is what will governments do with this extraordinary freedom. The markets will not just stand by and applaud, that's for sure. Remember what happened in 2010 during the debt crisis in Europe? New borrowing stemming from greater spending will need to be financed, and the price (interests) matters a lot. During a new wave of bond issuances, market players will be watching like a hawk how sustainable public debt are. And let's not forget about the risks of spillover to indebted Eurozone member states. In this situation the new asset purchase programmes opened by the world's leading central banks (i.e. the start of monetary easing) will come in handy, as it will keep yields at bay. Such an economic policy mixture could help economies avoid a prolonged recession.

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