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The European Commission has said the EU would suspend its strict rules on public deficits to allow governments to open the money taps to face the coronavirus pandemic.

In an unprecedented decision, Brussels triggered something called the “general escape clause”, giving countries free rein to “inject spending into the economy as needed,” EU chief Ursula von der Leyen said.

The temporary measure effectively halts strict oversight by Brussels of national spending and will be welcome in Italy, the country suffering most from the novel coronavirus and one often in violation of EU rules.

EU finance ministers are widely expected to formally approve the clause next week.

Meanwhile, the European Central Bank has relaxed some of its regulatory controls over banks in response to the coronavirus pandemic.

In a statement this afternoon, the ECB said regulators, including the Irish Central Bank, would temporarily exercise ‘flexibility’ when it comes to classifying debtors as ‘unlikely to pay.’

This will apply to banks that call on government established credit guarantees as well as in the case of ‘Covid-19 public moratoriums’.

In Ireland’s case, this would be the recently announced three month payment break for personal and business customers impacted by the fallout from the pandemic.

The statement lists a number of other regulations where flexibility will be shown given the ‘extraordinary nature of current market conditions.’ 

Elsewhere, the European Commission has said it’s ready to consider backing common debt issuance in the euro zone to help the bloc weather the massive economic impact of the coronavirus outbreak.

“We are looking at all instruments and whatever helps will be used,” Commission President Ursula von der Leyen told German radio Deutschlandfunk.

“This also applies to coronabonds – if they help and if they are correctly structured, they will be used.” 

The comments from the Commission president, a member of Chancellor Angela Merkel’s conservatives in Germany, which has long resisted pooling debt with heavily indebted European Union members such as Italy, suggest consensus is now building for such a step. 

Prime Minister Giuseppe Conte of Italy, which has lost more lives in the pandemic than any other country including China where it began, has called for special “coronavirus bonds”, or a European guarantee fund, to help EU states finance health spending and economic rescue programmes.

Germany, the bloc’s biggest economy, resisted common euro zone debt issuance at the height of the 2008 financial crisis that pushed the shared euro currency to the brink of collapse.

Asked about Conte’s bonds proposal, Merkel said earlier this week that euro zone finance ministers were discussing measures to support their economies but no conclusions had been reached. 

German Finance Minister Olaf Scholz has said member states with higher debt levels should have the fiscal leeway for stimulus packages. 

“The same thing applies to debt rules – we are loosening them so that states have every opportunity to use financial resources. We are looking at everything – everything that helps in this crisis will be used, because we’ll support our economy without ifs or buts,” Ursula von der Leyen said.

EU Economics Commissioner Paolo Gentiloni said today that the European Stability Mechanism (ESM) – the euro zone’s bailout fund – would be in the best position to issue coronabonds needed to fund emergency measures. 

The bonds “are market operations and must be launched by financial structures. The most suitable is the ESM,” Gentiloni said. 

He added there was still no decision but “discussions must continue.” 

The idea of a coronabond issued by the ESM has the support of some European Central Bank policymakers as well, a source told Reuters this week.

Further afield, in its latest effort to pump funds into the economy, the US Federal Reserve has announced new measures to enhance liquidity in state and municipal money markets.

The program will be administered by the Federal Reserve Bank of Boston and make loans to financial institutions secured by high-quality assets such as tax-free municipal bonds.

The effort comes on the heels of myriad earlier central bank steps to add liquidity amid large investor liquidations during an economic shock.

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