World News

EU open to more spending in countries hit by coronavirus outbreak

By Francesco Guarascio

BRUSSELS (Reuters) – Italy and other euro zone countries hit by the coronavirus outbreak are expected to benefit from waivers under EU fiscal rules that will allow them to spend more to tackle the emergency, the bloc’s economics commissioner said on Wednesday.

The outbreak, which first emerged in China, flared in northern Italy last week, increasing fears of a larger-than-expected fall-out on the European and global economy.

Under EU rules, high-debt member states like Italy are required to keep a lid on their spending and to lower debt.

But they allow for “flexibility clauses linked to so-called exceptional circumstances,” Paolo Gentiloni told a news conference, replying to questions about whether Brussels could grant Italy fiscal leeway to address the epidemic.

While most economists still forecast a quick economic rebound before the summer when the coronavirus is expected to lose steam, more spending in the most affected countries is seen as crucial to address the worst phase of the crisis.

Gentiloni said talks with affected countries will take place in coming months to assess under which conditions they can use fiscal flexibility. High-debt Italy has benefited in the past from EU waivers to meet reconstruction costs after earthquakes.

More spending is seen as the most likely reaction by EU governments against the virus outbreak rather than more monetary stimulus from the European Central Bank.

Gentiloni said it was still too early to fully gauge the economic impact of the outbreak, but acknowledged there had already been “a partial materialization” of the downside risks posed by the epidemic.

“We still do not expect this to trigger an ECB response, mainly because this will be seen as a transitory shock that is not well addressed by monetary policy,” J.P. Morgan bank said in a note on Wednesday. “Instead, the focus will be on fiscal policy to provide targeted support.”

The bloc’s economy would benefit from more spending in Germany and other countries with large savings, the EU has repeatedly said.

That could close a long-standing investment gap and help counter a slowdown that was expected even before the coronavirus outbreak hit hard in Italy, the third largest economy in the 19-nation euro zone.

Spooked by recession fears at home, Germany agreed this month for the first time in years to support more spending at euro zone level.

But its overall investment level remains low. “Public investment has continued increasing against the backdrop of a significant investment backlog,” the European Commission said in a report about Germany’s finances released on Wednesday, noting the country maintained a big budget glut and trade surplus.

(Reporting by Francesco Guarascio and Jan Strupczewski; Editing by Mark Heinrich)