March 21, 2020 / 9:35 AM / 8 days ago

EU executive moves to formalize suspension of EU budget rules

FILE PHOTO: European Union flags fly outside the European Commission headquarters in Brussels, Belgium, February 19, 2020. REUTERS/Yves Herman/File Photo

BRUSSELS (Reuters) - The European Union executive moved to formalize a deal reached by EU finance ministers on March 5 to suspend EU budget rules that limit borrowing, giving hardest-hit Italy and other governments a free hand to fight the coronavirus.

The European Commission, the guardian of EU rules, proposed late on Friday to activate a ‘general escape clause’ in the rules to respond to the pandemic, which has triggered lockdowns in most EU countries and the closure of Europe’s borders.

“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 Commission said.

EU rules say that governments have to keep cutting their budget deficits until they reach balance or surplus, and have to reduce their public debt/GDP ratio every year until it is at or below 60% of GDP.

Italy has been struggling to reduce its huge debt of 137% of GDP due to sluggish economic growth and additional spending to offset the effects of the epidemic would have normally drawn a rebuke by the Commision.

“The Italian government will be able to put as much money into the economy as needed. Normal budget rules, debt rules for example, will not be applied at this stage,” Commission head Ursula von der Leyen was quoted as telling Il Corriere della Sera paper.

Once the Commission proposal is formally accepted by EU finance ministers at their next meeting, government spending to fight the coronavirus will be excluded from Commission calculations of deficit and debt.

EU finance ministers, who have ultimate control of EU rules that limit government borrowing, agreed on March 5 that the economic impact of the virus was an emergency and an event outside their control, meaning EU budget rules should not apply.

They repeated that message on Monday, agreeing that the rules will not stand in the way of responding to the pandemic, which the Commission expects to cause a 1.0%-2.5% recession in Europe this year.

Reporting by Jan Strupczewski; Additonal reporting by Giselda Vagnoni in Rome; Editing by Louise Heavens and Helen Popper

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