COVID19, Vulcan Insight

EU Finance Ministers approve suspension of deficit limits

24 March 2020

The economic impact of Covid-19 and the European response was discussed at a meeting of the EU 27’s Economy and Finance Ministers over teleconference on Monday. The Council said that European policymakers needed to act decisively to restore confidence and ensure the shock remains as short and limited as possible, so the crisis does not create permanent damage and threaten the long-term sustainability of public finances. For the first time, the Council endorsed activating the “general escape clause” from the EU’s spending rules, saying that the conditions for the use of the EU fiscal framework are fulfilled. Finance Ministers said that they “remain fully committed to respect the Stability and Growth Pact”.

In a statement, the EU’s Finance Ministers said they agreed with the European Commission that the major economic shock caused by the coronavirus was sufficient to suspend restrictions on borrowing and spending, bringing an era of fiscal rectitude to an end. The EU’s fiscal rules, which were tightened in 2011 as a response to the eurozone debt crisis, stipulate that governments must keep budget deficits below 3% of GDP and public debt should remain below 60% of GDP. The Executive Vice President of the Commission, Valdis Dombrovskis, said in a statement that the temporary flexibility will enable national authorities to support their health systems, businesses and workers. The European Commission said it was prepared to do whatever necessary to address the crisis.

Meanwhile, Germany’s Finance Minister Olaf Scholz pledged on Friday to make unlimited financing available through the national development bank, making clear there is no upper limit to the total amount of aid that will be provided to affected companies. The Economy and Energy Minister also said that ‘no healthy company should go bankrupt because of corona, no job should be lost’. It is expected that the German government will push through emergency economic measures over the next few days, breaking the sacred ‘black zero’ as the balanced German public finances are known.

A study carried out by Munich-based IFO Institute found that the coronavirus could cause the German economy to shrink by a range of 7.2% to 20.6% this year, which would take hundreds of billions out of the public budget. This disruption is estimated to have an economic cost of between €255 billion – €729 billion. Major companies including Volkswagen and BMW have announced plant closures as part of efforts to halt the spread of the virus, while shutdowns have also curbed consumer demand.