EU says virus fund access to be linked to its budget advice

The European Union signaled Wednesday that it will not punish member countries for breaking the bloc's deficit rules to tackle the coronavirus but that it could condition their access to sorely-needed recovery funds on them following its advice on how to manage their budgets.

The 27-nation bloc is forecast to enter “a recession of historic proportions this year” as the coronavirus ravages its economies, with an average drop in output of 7.5 per cent.

Virtually every country has broken the deficit limit of 3 per cent of GDP as they've spent to keep health care systems, businesses and jobs alive.

"In all cases, apart (from) Bulgaria, we concluded that the deficit criteria of the treaty is not complied with. In normal times, this would lead to the opening of an excessive deficit procedure. But these are exceptional times," European Commission Executive Vice-President Valdis Dombrovskis said.

Dombrovskis' remarks came as he unveiled advice from the EU's executive arm, the European Commission, on how countries could weather the economic storm while continuing to promote growth and invest in policies that fight climate change and ease the transition to computer-based economies.

While the euro single currency rule book may be allowed to gather dust for now, Dombrovskis warned that it “is not suspended” and that countries will have to return to some budgetary rectitude in the medium term.

The commission's “ country specific recommendations ” released Wednesday are part of a system under which the executive arm monitors national budgetary plans and gives policy advice. Countries give the advice lip-service but are routinely slow to respond to it.

This time, however, Dombrovskis said that the recommendations will be “linked” to a massive recovery fund the commission is due to unveil on May 27, and which is expected to be part of the EU's new long-term budget, totaling well over a trillion euros.

He did not provide details about how the recommendations would be linked to the recovery funds.

The pandemic has hurt consumer spending, industrial output, investment, trade, capital flows and supply chains. It has also hit jobs.

The unemployment rate across the 27-nation EU is forecast to rise from 6.7 per cent in 2019 to 9 per cent in 2020 but then fall to around 8 per cent in 2021.

While the virus has hit every member country, the extent of the damage it ultimately inflicts will depend on the evolution of the disease in each of them, the resilience of their economies and what policies they put in place to respond.

Hard-hit countries like Italy and Spain will probably be banking on the recovery fund to survive.