Eurozone will flex budget rules to fight coronavirus, says Mário Centeno
Eurozone finance ministers will agree a “very large” policy response to fight the economic fallout of coronavirus, the president of the eurogroup has predicted, saying the bloc will unleash the “full flexibility” of its budget rules to boost spending.
Mário Centeno told the Financial Times that he expected member states to take fiscal measures that together add up to a boost “much larger” than the €27bn aggregate level that was mentioned by Christine Lagarde, the European Central Bank president, in a press conference earlier on Thursday.
Ms Lagarde said she was concerned that “complacency” on the part of governments could hamper Europe’s response to the crisis, but Mr Centeno insisted that fiscal authorities were ready to shoulder their responsibilities.
He laid out three layers of support that he expected to be endorsed by finance ministers on Monday: backing for health and civil protection; support for families and workers by, for example, supporting unemployment benefits and compensation for shorter working hours; and provisions to help companies facing liquidity shortages, including through tax deferrals and similar measures.
“What we have on our hands is still a health crisis, and of course it would be totally irresponsible on our part, and actually negligent, to let the situation morph into a crisis of confidence and a financial crisis because of inaction,” Mr Centeno said. “This calls for a powerful policy response from both finance ministers and central banks.”
Financial markets are in freefall as the scale of the damage being wrought by the virus becomes apparent across the world. On Thursday Ms Lagarde challenged finance ministers to unleash an “ambitious and collective fiscal response” to battle the crisis as she outlined the ECB’s own steps to shore up the economy. Her messages shook market confidence as she declared that it was not the central bank’s role to respond to movements in government debt markets.
As president of the eurogroup, Mr Centeno will chair Monday’s meeting of euro area finance ministers — a gathering that Ms Lagarde identified as a key moment for Europe’s crisis response. Many investors are deeply sceptical that EU governments will go far enough in their stimulus efforts to arrest the rapid deterioration in the region’s economic outlook.
Mr Centeno said that EU-wide action is needed to complement national measures, including by ensuring the region’s state aid and fiscal rules do not impede countries’ economic rescue efforts. “This is a quick evolving situation which of course needs quick action and we cannot be stopped by regulations,” he said.
“We will have a sizeable number in terms of fiscal action, which is connected with an increased flexibility — actually, as I put it, flexibility without limits — plus the action coming from the ECB and the financial instruments that will complete the economic policy package,” he said. “I expect a very large set of measures.”
Mr Centeno warned that the EU faced a grave situation if it failed to act decisively now. “This is the moment in time in which a V-shaped shock can morph into a U and then an L, and this is what we above all have to avoid.”
Accordingly, the EU should adopt the “full flexibility” available within its system of budget rules, giving member states the scope to boost spending to support businesses and households, he said.
The commission will outline on Friday the budgetary measures it wants to permit, alongside other policy proposals including accelerated state aid approvals of support for businesses struggling with the impact of the virus. One-off spending to fight the coronavirus is by definition excluded from calculations of a country’s so-called structural deficit — the budget shortfall that cannot be attributed to an economic downturn — and so can be disregarded within the fiscal rules.
On top of that, the commission will make clear that its rules allow it to strip out extra spending that is related to “unusual events” outside a country’s control — a source of flexibility that Mr Centeno wants to be fully deployed.
The budget rules also contain a further escape clause that could be activated if a severe regional economic downturn materialises down the line, a move that would go beyond the immediate steps being outlined by Mr Centeno.
“The goal is to tackle the immediate impact of this crisis and to provide certainty to economic actors. This is in some sense a confidence crisis,” said Mr Centeno, who is Portugal’s finance minister. “The size and persistence of the economic damage will of course depend to an extent on how governments handle the situation. And that’s where we kick in.”
Sam Fleming and Jim Brunsden