March 12, 2020 / 11:04 AM / in a month

Breakingviews - Three things the EU can do to cushion virus blow

European Union flags flutter outside the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, April 21, 2016.

MILAN (Reuters Breakingviews) - The European Union is poorly positioned to fight the economic shock caused by the coronavirus crisis. But it’s not powerless. Though the 27-nation bloc lacks central spending power to support Italy and other stricken member states, there are three things it can do quickly to help.

The crisis that has so far claimed more than 700 lives in the EU gives authorities in Brussels a chance to prove they are more than toothless bureaucrats. So far, their response has been timid. Travel restrictions and increasingly stringent containment measures – like Italy’s decision to close restaurants and shops – have depressed consumption and disrupted supply chains. This threatens the survival of companies in many industries, particularly airlines.

Though Brussels lacks fiscal firepower, it can make it easier for EU members to crank up spending. Governments will need to spend more to guarantee credit to companies and families, or pay for temporary layoffs. Italy has already earmarked 25 billion euros to fight the emergency. It will almost certainly bust the EU’s limit for budget deficits, which is set at 3% of gross domestic product.

The EU rules already exempt money spent to tackle unusual events, such as earthquakes, from deficit calculations. But that still requires a bilateral discussion with Brussels. Temporarily suspending limits on deficits and national debt would allow a faster and more effective response. The European Central Bank, which is set to unveil its response on Thursday, could help by promising to keep interest rates exceptionally low.

Restrictions on state aid are another candidate for short-term relief. Existing EU rules already provide for state support in exceptional circumstances. In 2010 Brussels allowed nations to compensate airlines for a week-long airspace blockage triggered by the eruption of an Icelandic volcano. Though the coronavirus crisis is likely to last longer and affect a much wider range of companies, similar pragmatism could apply.

Meanwhile, financial regulators can help banks sustain the economy by providing credit to firms facing cash flow problems. European banks have cleaner balance sheets and stronger capital buffers than a decade ago. Allowing them to redirect some of their spare capital would help. Regulators could also ensure that banks granting grace periods on loan and mortgage payments are not whacked with too stringent capital requirements.

As past crises have demonstrated, the EU often lacks the ability to produce a swift and coordinated response to an emergency. The coronavirus is an opportunity to show it is not entirely powerless.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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