EU finance ministers agreed Monday to suspend stringent rules on running public deficits in the bloc in a historic first that allows member states to spend freely to tackle the impact of the coronavirus pandemic.
The temporary measure effectively halts strict oversight by Brussels of national spending. It will be especially welcome in Italy, the EU country suffering most from the novel coronavirus and the one often found in violation of the bloc's rules.
The so-called general escape clause gives governments "the needed flexibility to take all necessary measures for supporting our health and civil protection systems and to protect our economies," a statement said. Heavily indebted Italy but also France and Belgium have already ripped up the EU rule book, announcing tens of billions of euros in extra stimulus cash to fight a disease that has shut down their economies.
The holiday from the EU's most emblematic fiscal rule is the biggest effort yet by member states to collectively face the calamity of the COVID-19 outbreak. The European Central Bank has meanwhile announced 750 billion euros ($810 billion) in monetary stimulus to reassure the markets and freed up banks to lend an extra 1.8 trillion euros.
Germany, normally ferocious about balanced budgets, has opened its own money taps, announcing 156 billion euros of new borrowing to ease the impact on its own economy. The escape clause was created in 2011 at the height of the eurozone debt crisis. Rules on debt and deficits were tightened in an effort to preserve the single currency bloc from further shocks.
Known collectively as the Stability and Growth Pact, the rules theoretically limit a country's annual budget deficit to three percent of economic output and its accumulated debt to 60 percent. Italy has breached the debt ceiling by more than double in recent years. The escape clause will allow countries to spend without limit on medical equipment, on enforcing containment measures and expanding hospitals.
"The conditions are met in that we are experiencing a severe downturn in the euro area and the EU as a whole," said EU executive vice president Valdis Dombrovskis after the meeting. The ministers will videoconference again on Tuesday to debate other ways to join forces to fight what is certain to be a debilitating recession for the whole continent and the world economy.
To the great irritation of Italy and France, excluded is the idea of raising money collectively across the bloc to help counter the severe downturn with stimulus spending. Any mutualised EU debt is political poison in Germany, the eurozone's economic powerhouse where talk of so-called "eurobonds" elicits an angry reaction.
Northern Europeans have a deep distrust of tying their fate to big debtors such as Greece or Italy and often accuse their southern partners of lacking fiscal discipline.
The ministers are expected instead to allow countries to request loan guarantees from the eurozone's bailout war-chest, the European Stability Mechanism, which has 400 billion euros available. In theory, lending from the ESM comes with conditions, which Italy opposes, but northern countries such as Germany, the Netherlands will likely demand them.
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