The key framework of European economic policy it the Stability and Growth Pact. With its strict criteria for Member States (government deficit no more than 3 % of GDP, government dept no more than 60 % of GDP), the EU is setting strict rules, which can only be clearly departed from for a short period in case of a serious crisis. Similar to the 2008 financial and economic crisis, this is now the case. However, in contrast to then, this exemption is no longer granted to individual countries, but to the entire European Union. The collective option had been introduced within the scope of the 2011 reform of the Stability and Growth Pacts (the so-called “Six-Pack”).  

In the Commission’s Communication on the coordinated economic response to the COVID-19 Pandemic from 13th March 2020,  the Commission declared that it was ready “to propose to the  Council that the Union institutions activate the general escape clause to accommodate a more  general fiscal policy support.” A week later, on 20th March 2020, von der Leyen presented the concrete communication, stating among other: “As the crisis is an event that is outside the control of governments with a major impact on the public finances, the unusual event provision of the pact applies.” Three days later, on 23rd March 2020, the Council of Finance Ministers confirmed the application of the escape clause within the scope of a video conference.  

In the meantime, several Member States have adopted extensive aid packages. Whilst the Austrian government announced an aid package of 38 billion Euro on 18th March, Germany is planning a supplementary budget of 150 billion as well as a fund of 400 billion. Spain also announced – in addition to the already announced 14 billion – a package of 200 billion. France has allocated 300 billion so far.

Anything else, but the application of the general escape clause to deal with the now starting crisis would have been a fatal step, as it was set up especially for crises like this. However, the important question as to how quickly the Commission will demand the adherence to the rules again, is still open. A renewed, too fast order to a “return to normal” could repeat the mistakes that followed the financial and economic crisis. Then too, the initial reaction had been correct and pragmatic, however, the consolidation obligation, which to a large part had already started in 2010 – based on the obligation according to the Stability and Growth Pact – triggered a new recession. Hence, not only Greece is still feeling the impact of that austerity policy, and there is reason to fear that the Corona crisis will show the disastrous consequences of austerity measures f.e. on public healthcare systems in many countries in the past.

However, one of the decisive factors will be how deep the current recession will be and how long it will last. The more serious the economic and social crisis, triggered by Covid-19 will be, the more unlikely will it be to reign in the budget rules quickly and without consequential damage.

Unfortunately, the crisis has also put the general debate on reforming the Stability and Growth Pact on the backburner; the Commission had started the debate in February 2020 with the target to promote investments and to achieve the implementation of the Green Deals. The necessity to bring the strict fiscal rules into the 21st century and to promote investments has not only been known for many years, but is – in view of the known weaknesses – also urgently required. Therefore it will be even more important to continue the reform of the Stability and Growth Pact when Europe has overcome the Corona crisis at the latest.

Further information:

AK EUROPA: Europa in the grip of the Covid-19 crisis

AK EUROPA Policy Brief: Economic Governance - Focus on Sustainable Development of Well-Being

AK EUROPA: Stability and Growth Pact: Commission launches reform debate

A&W Blog: Eine fortschrittliche Reform der EU-Budgetregeln? (german only)

AK Wien: Hohes Budgetdefizit ist ökonomisch notwendig und sozial sinnvoll (german only)