Report. The impact of the coronavirus on financial markets and the global economy are forcing European leaders to allow for budget flexibility. ‘Coronavirus would be eligible’ for the emergency clause of the EU growth pact.

Coronavirus opens the door to deficit flexibility from the EU

The government is preparing for a technical recession, and it has secured a promise from the European Commission: this year, due to the crisis caused by the coronavirus, the country’s finances will be evaluated with “flexibility.” This was confirmed yesterday by EU Economy Commissioner Paolo Gentiloni, who explicitly signaled he was open to this possibility. 

This is not a new practice, but rather one requested and granted to Italian governments since 2015 for traumatic events such as earthquakes, as well as to meet the political need of stabilizing uncertain and unsettled political majorities. Gentiloni said that such a measure will be the subject of discussion in the coming months. 

Regarding a precise evaluation of the size of the impact caused by the virus—including as amplified by the media—on the economy, Gentiloni, speaking in a press conference in Brussels on Wednesday, struck a balanced tone: “There are no certainties. At the G20, concern was expressed regarding the Asian economy. At the moment we cannot quantify this. But there will certainly be an impact on the performance of the global economy.”

Even the “bad cop” to Gentiloni’s usual “good cop” act, the Latvian Vice-President of the EU Commission Valdis Dombrovskis, said, in his usual inquisitorial tone: “We already have a clause in the Stability and Growth Pact referring to unusual events outside the government control, which is for all kinds of emergencies. Of course, issues concerning coronavirus would be eligible under this clause. Should there be a concrete request from member states, we will be open to discuss it.” 

Accurate data for the accounting of “flexibility” in relation to the adaptable Stability and Growth Pact will be provided by the Commission in May together with the spring economic estimates. For the next economy and finance planning document (DEF) in April, and then for the budget law that is already weighed down by a million new VAT clauses, we might start from a deficit above 2.2%. Hence the request for “flexibility,” which, given the climate, might end up being a record-breaking one.

Prime Minister Conte himself spoke of a “recession” this week, in an attempt to stop the “panic” induced by a drop in production activities in the provinces of Pavia, Lodi, Cremona and Milan (which account for 12% of GDP) and by the initially uncoordinated measures that produced an unjustified climate of being “under siege” in many cities, especially in the North. A recession—something no one dared to speculate about until the end of last week—is now becoming a plausible scenario. 

On Feb. 23, the Governor of the Bank of Italy, Ignazio Visco, estimated a negative impact in the amount of 0.2% of GDP. Prior to the emergency, the EU Commission had set the bar at a growth of 0.3% of GDP in its winter forecast. The Italian government had forecast an overly optimistic 0.6%, despite the dramatic slowdown in industrial production recorded in the last quarter of 2019: -1.4%, with a fall of 2.7% in December alone. The main cause was the sharp economic slowdown in Germany, but that’s not the only place where this phenomenon is occurring.

Clearer data will begin to arrive starting on March 4, when ISTAT will publish data regarding the public accounts. This year, we’re starting from two tenths of a point below zero. In this regard, Minister of Economy Gualtieri had said he was expecting a “rebound” of the economy, but the reasoning behind this theory was not very clear in the first place. In the atmosphere of panic created in a virus-infected economy, the scenario of an economic rebound might turn into one of accelerated drop: instead of the hoped-for upward movement (from stagnation to aphasic growth), there could be a downward shift (from stagnation to recession).

In the EU Commission’s “country report” on Italy, the items previously noted in connection with the criteria of the Stability Pact remain exactly the same: high debt, a demand for “structural reforms,” a needed increase in “productivity” on the supply side and the controversy against the “Quota 100” early retirement scheme and its impact on public expenditure. Further additions to the list will be the “investments” in the transition to “green” capitalism, which can only be envisioned in a stagnant environment that is also being strongly disrupted by a creeping government crisis, a matter regarding which Conte was saying a few days ago that he was looking for a “radical cure.”

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