March 5, 2020 / 2:15 PM / a month ago

Unshackled by EU, countries have fiscal freedom to fight coronavirus

BRUSSELS (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 suffers severely, officials said on Thursday.

FILE PHOTO: An employee in a drug store wraps protective face masks, due to a coronavirus outbreak, at Zaventem international airport near Brussels, Belgium, March 4, 2020. REUTERS/Yves Herman

The decision, the latest by policymakers around the world to open state spending taps to counter the virus, could throw a lifeline to Italy which has been struggling to comply with EU requirements to cut deficit and debt.

Italy has suffered Europe’s worst outbreak, with most of the infections in the northern region that powers its economy.

EU finance ministers, who have ultimate control of the application of EU rules that limit government borrowing, discussed on Wednesday a response to the impact of the epidemic on growth. They agreed the economic impact of the virus 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 meeting was held 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.

Meanwhile, other countries have also moved to bolster their war chests.

China, the source of the outbreak, said it had earmarked 110.5 billion yuan ($15.9 billion) to fight the epidemic as of Wednesday. The U.S. House of Representatives has approved over $8 billion, while the likes of South Korea, Indonesia and Singapore have all announced big spending packages.

GOOD NEWS FOR ITALY

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

It is also good news for highly indebted Italy. The north, which has been most affected by the virus, produces almost a third of the 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,” said a third official involved in the discussions.

“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 and Pravin Char

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