On Friday 20 March, the European Commission presented its proposal to use – for the first time in the history of the euro area – the ‘general escape clause’, already provided for in the current Stability and Growth Pact, to reinforce emergency budgetary measures in response to the COVID-19 pandemic.
“Today, and this is new, it has never been done before, we are triggering the general escape clause. This means that national governments can inject as much into the economy as they need. We are relaxing the fiscal rules to allow them to do so”, said its President, Ursula von der Leyen, via Twitter.
She said European leaders are keeping their word when they promise to do whatever is necessary to support the economy crippled by the pandemic, citing the new “most flexible ever” State Aid rules (see EUROPE 12450/7), decisive action by the European Central Bank (see EUROPE 12450/6) and the €37 billion package tabled by the Commission (see EUROPE 12446/2).
This general escape clause allows the suspension of the recommended budget adjustment for a State in the event of a severe economic downturn in the euro area or the European Union. It will apply to all countries, regardless of their fiscal situation.
“We are still within the Stability Pact, but we are moving to the next level. This will allow for broader fiscal measures”, one source said Friday. This will include, for example, budgetary expenditures related to population containment and medical treatment of the pandemic.
It is up to the EU Council to formally approve the activation of the budget clause. An Ecofin Council will be held on Monday 23 March by videoconference. The Eurogroup, which now meets weekly to take stock of the fight against the pandemic, will meet the next day, also remotely.
But, in the opinion of one national diplomat, the positions of the Member States are not aligned on the issue, not least because it is a new tool. While Northern European countries have adopted substantial emergency measures to enable the economy to hold up and bounce back from the crisis, they fear that opening the budget floodgates unconditionally could create moral hazard.
Last Monday, the Eurogroup had not asked the Commission to activate this clause, sticking to the possibility for States to activate the clause on unusual events in order to exclude certain expenditure from the calculation of the structural budgetary effort (see EUROPE 12448/3).
But the next day, at the end of a European summit held by videoconference, the President of the European Commission, Ursula von der Leyen, had indicated that the institution would present, in the coming days, a proposal to activate the general escape clause (see EUROPE 12448/1).
Judging by this unprecedented budgetary measure and the new €750 billion PEPP operation for the massive repurchase of private and public securities announced by the ECB on Wednesday, the European and Member States’ response to the health crisis and economic paralysis caused by the coronavirus exceeds by its scale the measures adopted to tackle the 2008 financial crisis and the subsequent public debt crisis.
Mobilise the ESM? Consideration is currently being given to mobilising the European Stability Mechanism (ESM), the permanent rescue fund for the euro area, which currently has a clout of €410 billion.
One of the fund’s unused areas of expertise is the provision of credit lines (ECCLs and PCCLs) to euro-area countries facing exceptional difficulties, but which remain solvent to the extent that they continue to have market access.
The current reform of the ESM, which is still being finalised, provides for an enhanced role for the rescue fund in crisis prevention and management and relaxes the conditions for access to the precautionary instruments represented by the ECCL and PCCL lines of credit.
“The ESM needs to open its lines of credit to all States. Europe must use all its firepower”, said Italian Prime Minister Giuseppe Conte on Thursday 19 March, as reported in the newspaper Corriere della Sera.
However, Italy, a euro-area country hit hard by the coronavirus crisis and which could call for such assistance, has long held back the finalisation of the reform, in particular for fear that it would make it more difficult to manage the day-to-day servicing of its public debt (see EUROPE 12384/1).
‘Coronabonds’. Other policymakers at the European level are advocating joint public debt issues to tackle the crisis.
The Renew Europe group advocates, for example, the rapid creation of sovereign bond-backed securities (SBBS) that do not involve risk pooling (see EUROPE 12450/11).
The Commission’s proposal was quickly buried in the EU Council because of opposition from countries like Germany, which fear that this step will ultimately lead to the creation of genuine ‘Eurobonds’.
See the communication from the Commission: https://bit.ly/2U90QxL (Original version in French by Mathieu Bion)