- On 23 March EU finance ministers backed activating the Stability Pact’s general escape clause.
- Governments can spend more to sustain jobs and businesses without breaching the EU’s deficit rules.
- It is complemented by the temporary state aid framework, which eases loans, guarantees and grants to affected companies.
On 23 March 2020, the finance ministers of the European Union member states, meeting by video conference, agreed with the assessment of the European Commission, which three days earlier had proposed activating the general escape clause of the Stability and Growth Pact. That clause allows a temporary departure from budgetary requirements in the event of a severe downturn in the euro area or the Union as a whole.
It is a decision without precedent since the clause was created in 2011, and it comes in the midst of the coronavirus crisis. It frees governments from the pressure to cut spending to meet deficit limits and lets them concentrate on what is urgent: health, protecting jobs and supporting companies’ liquidity. Shortly before, on 19 March, Brussels had also approved a temporary state aid framework.
The rules and what is relaxed
The Stability and Growth Pact sets limits for public accounts: a deficit of 3% of GDP and debt of 60%, together with adjustment obligations for countries that exceed them. The general escape clause does not suspend the pact or cancel those goals, but it allows a temporary departure from the adjustment path, provided medium-term fiscal sustainability is not put at risk.
In practice, it means a government can increase spending or reduce revenue without Brussels demanding a lower deficit in that year. It is not a blank cheque: each country will still have to finance itself in the markets, and borrowing costs do not depend on the Commission alone. That is why the decision is accompanied by calls to coordinate national responses.
The framework for aid to companies
European competition rules limit public aid to companies, because it could distort competition between countries. The temporary framework of 19 March relaxes those rules for as long as the crisis lasts. It allows, among other measures, direct grants limited to 800,000 euros per company, public guarantees on loans, subsidised-interest loans and tax deferrals.
For companies, the relevance is that the instruments governments announce now have European legal cover and less risk of being challenged. In Spain, the Official Credit Institute guarantees approved the previous week operate within that framework. Each aid will have its own conditions, deadlines and requirements, which should be read in detail before applying.
What to review
Companies should identify which aids exist in their country and region, who they are aimed at and which can be combined. State aid often has cumulative limits, and exceeding them can mean repaying part. An adviser can help choose the most suitable combination.
It is also worth bearing in mind that the public debt financing these measures will have to be paid at some point. More spending today leads, sooner or later, to a debate about future revenue. Planning prudently, and not assuming that present conditions will last, is part of good medium-term cash management. Companies receiving public financing should, finally, keep in good order all the documents that justify its use, because aid is usually subject to later checks.
In an emergency the rules are relaxed; the responsibility to plan is not.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
