Yale School of Management

Program on Financial Stability

Improving our understanding and management of systemic risk.

European Commission Relaxes Rules to Allow Members to Respond Quickly to COVID Crisis

March 25, 2020
: By: Mallory Dreyer

Access our live “financial-intervention” tracker, which is a single point-of-entry on the YPFS website to keep up with financial-crisis fighting interventions by central banks, fiscal authorities, and international organizations  here.

On March 19, 2020, the European Commission (EC) said it has relaxed its State Aid rules to allow European national governments to respond quickly to the coronavirus crisis.

In general, the EC’s State Aid rules seek to prevent EC member governments from using state aid to give their countries’ businesses a competitive and unfair advantage. The “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak” recognizes that its member governments need to work together to mitigate the impact of COVID-19 on the European economy. The framework will be in place through the end of December 2020, although the EC can extend it if necessary. 

The EC adopted a similar temporary resolution during the Global Financial Crisis in 2008. 

Under the temporary framework, countries may adopt the following types of programs, in addition to pre-existing options: 

1. Direct grants, repayable advances, or tax advantages

Member States can grant aid in the form of direct grants, repayable advances, or tax advantages to companies impacted by the coronavirus, up to EUR 800,000 per company. 

One example of a program already announced under this framework is the UK’s Coronavirus Business Interruption Loan Scheme, which includes a measure to provide direct grants to SMEs affected by COVID-19. The budget for the program is approximately EUR 654 million, and direct grants to individual companies will not exceed EUR 800,000. The EC has recently approved programs from other Member States, such as Germany, which also is providing direct grants, and Luxembourg, which will provide advance payments to companies.

2. Loan guarantees for both SMEs and large enterprises

Under the framework, Member States can implement new, or expand existing, guarantee programs. Credit guarantee programs are already common among EU countries, but under the Temporary Framework, governments can modify the terms of the programs to further encourage banks to lend to companies facing liquidity constraints due to COVID-19. The maximum coverage ratio for guarantees has been increased to 90% of eligible loans. Loans for both working capital and investment are eligible under the framework. 

On March 22, 2020, the EC approved a new loan guarantee program in Portugal. The program has a EUR 3 billion budget and targets SMEs in four specific sectors impacted by COVID-19: tourism, restaurants, manufacturing, and travel agency or related activities. Other Member States, such as the UK, Spain, and Germany, have announced new or expanded credit guarantee programs under the framework. 

3. Subsidized interest rates on loans 

Member States can also lend to companies at reduced interest rates. Loans under this framework can be used for working capital or investment. The EC approved the Latvian subsidized loan scheme for companies affected by COVID-19. The budget for the program is approximately EUR 200 million, with EUR 50 million from the State budget. The program includes loans for working capital at reduced interest rates, in addition to a credit guarantee scheme. 

The temporary framework also allows Member States to recognize the state aid channeled through banks and other credit institutions to companies as aid that ultimately benefits the companies, rather than the banks. For example, a loan guarantee program targeting the tourism sector will be considered aid for the tourism sector, despite the fact that the guarantee program may involve financial institutions making lending decisions.The framework also allows Member States to provide short-term export insurance. 

See: Credit Guarantee Programs for Small and Medium-Sized Enterprises.

See:  The YPFS Live Financial Intervention Tracker.

EU