March 5, 2020 / 1:53 PM / a month ago

EU grants governments fiscal leeway to fight coronavirus impact, eyes more

* EU budget rules allow for extra spending in emergencies

* Extra spending should be for fighting effects of epidemic

* EU might consider more concerted stimulus as economy suffers

By Jan Strupczewski

BRUSSELS, March 5 (Reuters) - The European Union is giving governments all the fiscal leeway they need to individually deal with the economic impact of the coronavirus and may decide on a more concerted stimulus if the economy severely suffers, officials said on Thursday.

EU finance ministers discussed on Wednesday a response to the impact of the epidemic on growth as the European Commission issued a note estimating the outbreak would curb euro zone growth this year below the 1.2% forecast just weeks ago in mid-February, although it was still impossible to say by how much.

The ministers, who have ultimate control of the application of EU rules that limit government borrowing to underpin the euro, agreed the impact of the coronavirus on EU economies was an emergency and an event outside their control.

In such exceptional cases, EU budget rules, called the Stability and Growth Pact, allow governments to stop cutting deficits and public debt, and address the challenge at hand. There is no limit set in this flexibility clause.

“In general, there is political agreement that governments are free to fiscally address the emergency and we will worry about the Stability and Growth Pact later,” one official involved in the Wednesday teleconference said.

Two others confirmed that, but noted the extra spending would have to be clearly linked to mitigating the effects of the epidemic, which would be verified by the European Commission.

“The key is to have a system in place to verify we are actually targeting expenses connected to the coronavirus,” a second official involved in the teleconference said.

“We did something similar during the migration crisis (in 2015). At that time, only expenses above a multi-year average were excluded from the rule, and the amount excluded decreased gradually over 3 years,” the official said.

GOOD NEWS FOR ITALY

The choice of individual government responses rather than an pan-EU one was, for now, more convenient to speed things up.

It is also good news for highly indebted Italy, which has been struggling to respect EU requirements to cut deficit and debt, but which is also one of the hardest hit by the virus outbreak which has most affected the north which produces almost one third of the entire country’s GDP.

Rome introduced 900 million euros of financial support for the worst-hit areas last week and later promised spending of 3.6 billion euros to help the wider economy, a sum which might rise to 4.5 billion, or 0.25% GDP.

“As this is an emergency it is ... more effective for countries to act first,” a third official involved in the discussions said.

“Fiscal rules have a clause available to cope with this, the European Commission will try to make clear in the meantime how this will be implemented, what policies, that it has to be targeted, timely, temporary,” the official said.

“On top of this, if growth is deeply hurt, we will consider a more accommodative stance at aggregate level,” the official said, adding the commitment would remain vague for now.

In the wake of the Lehman Brothers bank collapse, the EU decided in late 2008 on a European Economic Recovery Plan that would pump some 200 billion euros, 1.5% of the then EU GDP, into the economy to boost demand and stimulate confidence in 2009.

The number was an aggregate number of stimulus estimated to be adequate and was to be a reference for governments on how much to boost spending, but many countries went above that.

“It is not clear how this would work this time, it would surely need to be linked with investment in policy priorities,” the third official said. “But it is too soon to say. Also because it is not clear how a demand push would solve a supply chain problem.”

Officials said a response to the economic impact of the coronavirus would have been easier had the 19 countries sharing the euro had a euro zone budget to cushion such external shocks.

But a miniscule euro zone fiscal capacity of 12.5 billion euros over 7 years now only under consideration as part of a wider EU budget, excludes such purposes on the insistence of Germany and the Netherlands. (Reporting by Jan Strupczewski Editing by Alexandra Hudson)

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