Tag Archives: coronavirus

The Franco-German proposal for a €500 billion recovery fund

by Professor Iain Begg
Academic co-Director of the Dahrendorf Forum at the London School of Economics and Political Science and Professor at the LSE’s European Institute

20th May 2020

This article was first published by The UK in a Changing Europe

Too slow, too small, too hidebound by conditions, and too little evidence of solidarity: these are among the persistent criticisms of the EU response, so far, to the economic challenges of Covid-19.

Although the Commission is expected to produce its own proposals for a new recovery instrument on 27 May, it has now been pre-empted by a Franco-German proposal, published on 18 May, for a new fund. It is ambitious and, although a lower headline total (at €500 billion) than some were canvassing, would be a major contribution to dealing with the economic crisis.

Their proposition is beguilingly simple. The EU will be empowered to borrow to enable it to spend more than it would otherwise, with the additional money going to regions and sectors most hit by the Covid-19 economic crisis.

The new money will be channelled though the EU budget and the detailed spending will be negotiated alongside the EU’s multi-annual financial framework (MFF) for 2021-2027. The latter – already badly delayed – will determine the mix of ‘usual’ outlays on agricultural, regional development, research and other policies.

The proposed amount is a little over three times the annual budget of the EU or about half the amount expected (prior to Covid-19) to be allocated over the seven years of the next MFF. Spread over the seven years of the MFF, the new fund would be of the order of half a percentage point of EU GDP, large enough to make a difference, in conjunction with extensive national fiscal measures.

The text refers to familiar German priorities for any EU fiscal intervention of supporting the ‘resilience, convergence and competitiveness of European economies’. In addition, the plan has the parallel ambition of favouring investments in the green transition, the digital economy and innovation. These chime with the (pre-Covid) agenda set out by Ursula von der Leyen.

However, if the fund is to serve the immediate macroeconomic need for a fiscal stimulus, the money would best be spent in the earlier years of the 2021-27 MFF. No doubt, some projects can be found which reconcile short-term fiscal stimulus and these longer term goals, but there is a risk that being too focused on the new will crowd out the immediate.

Unlike the previous measures agreed by the EU and due to be implemented as soon as June 2020, the new fund would be grants, not loans. This is important for the heavily indebted countries like Italy or Greece, because the extra debt they are already accumulating is bound to raise financing problems, notwithstanding the prevailing very low rates of interest.

Crucially, too, member states will not have to increase their contributions to the EU, forestalling one likely objection to the new fund. However, the money will have to be re-paid by the Commission and the suggestion in the proposal is that the repayment would take place after the end of the next MFF. By implication, the repayment would be a first call on future EU budgets.

The proposal has the potential to be ground-breaking both by providing a rapid increase in EU expenditure after decades during which the budget has remained at around one percent of GDP, and by establishing the principle of a (quasi) federal deficit as an instrument of EU level economic policy. These features are, however, also likely to be the source of friction from different quarters.

Opponents of a larger EU budget, concerned about letting the genie out of the bottle, will fear that once a bigger budget is agreed, it will be hard to reduce it again. More subtly, if the new spending goes disproportionately to the relatively richer countries which, on current evidence, have suffered (or will suffer) most from the pandemic, expect objections from poorer countries.

The proposal must be seen as a significant concession from Germany to French demands for EU fiscal policy. German trepidation is evident in the language revealing that the new fund will be ‘ambitious, temporary and targeted’.

The big question now is whether Germany, in turn, can cajole the other net contributors to accept so radical a move. The resistance to agreeing a new EU budget following Brexit had been led by the ‘frugal four’ (Austria, Denmark, the Netherlands and Sweden) who argued that the loss of the UK net contribution should be accommodated by cutting the EU budget.

For them a sudden jump to a budget 50% larger than they the amount rejected just three months ago will be tricky. The Dutch government came in for especially strong criticism for obstructing the MFF agreement and its reaction to the Franco-German proposal will be pivotal.

Some concerns can also be expected from central and eastern European countries where the economic effects of the virus have been less severe. The underlying tension here is net positions. If the recovery fund is, as the plan proposes, targeted, suspicions will be rife about an unfair distribution of costs and benefits: juste retour consistently trumps objective spending criteria.

Moreover, several aspects of the Franco-German plan remain to be clarified. They will be central to the delicate process of negotiation characteristic of EU budgetary deals, and will dovetail with concerns about whether the proposals can be ‘temporary’ or, instead, inevitably lead to a transformation of the EU role in public finances.

Potentially the most toxic is how the money the EU borrows will be repaid in post-2027 MFFs. Will the size of the budget revert to the pre-virus norm of one percent of EU GDP and, if so, will the repayments be subtracted from future EU ‘normal’ spending? Such a proposition would induce howls of protest from net beneficiaries.

Italy and Spain have emphasised the word ‘solidarity’ and have been resolute in opposing the imposition of conditions for financial support. But briefings by the Germans suggest the key to persuading the ‘frugals’ is, precisely, to adopt conditionality and the text explicitly refers to ‘sound economic policies and ambitious reform programmes’.

There is also the issue of revenue raising, with the proposals hinting at new digital taxes. Germany has long resisted the idea of taxing powers at the EU level and the text is, perhaps deliberately, vague on the matter. The scope for others to seize on this should not be under-estimated.

The Franco-German proposal is imaginative and could be a game-changer. It reflects obvious alarm from both proponents about the damage being done to the European project by public perceptions of dither and delay. Will it succeed?

Federal states deal best with the pandemic

by David Gow
Editor of Sceptical.scot, Senior Adviser at Social Europe and Senior Adviser at Acumen Public Affairs. He is former European Business Editor of The Guardian and worked for The Scotsman and London Weekend Television.

26th May 2020

Federal Germany has won substantial plaudits around the world, not least in other parts of Europe, for its comparative success in suppressing and/or mitigating the coronavirus pandemic. Others have pinpointed the relative success, too, of federal Australia in controlling the spread of infections.

Continue reading Federal states deal best with the pandemic

Covid-19 and a Fracturing UK

by Dr Kirsty Hughes
Director, Scottish Centre on European Relations

13th May 2020

This article was first published by the Scottish Centre on European Relations

The shift in England to a more substantial easing of lockdown restrictions, while Northern Ireland, Scotland and Wales stick to a slower route and to the ‘stay home’ messaging, has received much attention this week. But is this a significant political division or a storm in a tea cup over differences across the devolved nations?

Continue reading Covid-19 and a Fracturing UK

How will COVID-19 impact Brexit?

by John Stevens
Chairman of the Federal Trust; Former Member of the European Parliament (1989 – 1999)

4th May 2020

In the latest iteration of the unempathetic essence of their cause a debate is emerging amongst the supporters of Brexit over whether the crisis created by the COVID-19 virus will prove politically to be a help or a hindrance. It is most apparent in the issue of whether the United Kingdom should accept an extension of the transition period for leaving the European Union beyond the present deadline of the end of this year. But it also infuses discussion (or lack of it) over the appropriate exit strategy from the on-going lock-down and even impinges on collateral controversies as varied as those over the Government’s procurement of protective equipment for health and care workers and our future relations with China.

Continue reading How will COVID-19 impact Brexit?

Combating Coronavirus: the good news from Vienna

Chancellor Sebastian Kurz (centre), Minister Rudolf Anschober (r.) and Minister Karl Nehammer (l.) on 26th February 2020. Image copyright: BKA/Andy Wenzel

by Richard Bassett
Bye-Fellow of Christ’s College Cambridge and the author of “For God and Kaiser”, the first history of the Habsburg Army to be published in English (Yale 2015). From 1982 to 1991, he was the Central Europe Correspondent of The Times.

4th May 2020

George Bernard Shaw once wrote, with perhaps the memory of 1914 uppermost in his mind, “the most important bad news in the world is the bad news from Vienna.” Unconsciously echoing Shaw’s judgement, the popular German media in the middle of March chose to focus on the Austrian  Tyrolean village of Ischgl as the source of “most German Coronavirus infections”. Initial German contact tracing had found that many of the first German victims had returned home recently from skiing holidays in and around the village. With “characteristic laxity” the “venal Austrian authorities” had permitted the popular ski-resort to continue “partying for days” after infectious cases had been traced to the village.

Continue reading Combating Coronavirus: the good news from Vienna

How different will this time be? Assessing the prospects for economic recovery from the Covid-19 crisis

Image courtesy of Wikimedia Commons

by Professor Iain Begg, Academic co-Director of the Dahrendorf Forum at the London School of Economics and Political Science and Professor at the LSE’s European Institute

and

Professor Jun Qian, Professor of Finance and Executive Dean at Fanhai International School of Finance, Fudan University

22nd April 2020

This article was first published by Dahrendorf Forum.

What shape will the world’s recovery from the economic fallout of Covid-19 take? The choice is in politicians’ hands, and with the critical European Council meeting on April 23rd, they would be wise to realise the need for closely coordinated economic policies.

V, U, W or L? No, these are not answers to a word puzzle or some obscure form of cryptography, but symbols to describe how the current global downturn, expected to be far worse than during the financial crisis of the late 2000s, might evolve. Each letter represents how the trajectory of gross domestic product would appear on a graph.

With the world economy already experiencing a sharp fall in GDP and rapid rises in unemployment, forecasters have been struggling to work out how big it will be and how long it will last. Projections reported by Gita Gopinath, the IMF Chief Economist, suggest the world economy will shrink by 3 percent in 2020, instead of 3.3 percent growth forecast just three months ago. Assuming an early peak in the incidence of the virus (and that the countervailing policies are successful), it will recover strongly in 2021 to achieve growth of 5.8 percent.

The downturn is exceptional because it is a deliberate policy action. By putting substantial parts of the economy into hibernation, the aim is to reduce economic and social interactions so as to curb the spread of Covid-19. In each of the four symbols this is captured in the downward swing. Governments are, however, under considerable pressure to return to whatever passes for normality as quickly as possible.

‘V’ is the most optimistic scenario. Its downward phase will quickly be followed by a rebound: a sort of trampoline effect. A ‘U’ shape would imply a more prolonged period of stagnation after the initial fall, but an eventual return to trend growth.

‘W’ and ‘L’ are more worrying. The former implies a short-lived recovery would be followed by a further downturn, as might occur if a second wave of infections occurred. During the euro sovereign debt crisis, many countries were afflicted by such double-dip (even treble) recessions.

‘L’ is the most alarming, because it could arise if the aftermath of the lockdowns wipes out economic capacity permanently, instead of just suspending it. This effect could be exacerbated by ‘scarring’ of workers and investors. Economies would, at a stroke, have seen a step-change downwards, with trend growth resuming from a lower base.

The Chinese experience

China, as the first country to enter lockdown, can provide some insights into what to expect elsewhere. It is, arguably, already past the trough and the experience of SARS in 2003 gave grounds for optimism of a ‘V’ recovery. However, Covid-19 rapidly became a global phenomenon, rather than one largely confined to East Asia, and the negative feedbacks from different parts of the global economy could prove far more debilitating for China.

As we write this piece, the first quarter GDP and a host of other economic indicators have been released. We have certainly witnessed the first stage of the ‘V’ (or any of the other symbols): for the first time in more than 40 years, the Chinese economy contracted in a quarter, by 6.8% from the same period a year ago; Hubei Province, the epicentre of the outbreak, experienced a contraction of almost 40%. Going beyond the headline figures, exports dropped much more than imports. Investment in fixed assets and consumption (as measured by total retail sales of consumer goods), both important engines for growth, fell sharply (by more than 15%) in the first two months.

On the positive side, the Chinese economy started to recover in March. In particular, all indicators, including those based on satellite images showing the movements of people, cars, ships, etc., as well as parking lots of factories, show that manufacturing sectors, including steel and automobiles, are recovering faster than services sectors. These patterns are unsurprising, given that so many service activities require large groups of people to come together in the acts of production and consumption. In addition, SMEs (small- and medium-sized enterprises) were hit particularly hard, and have been recovering more slowly than large firms in all industries and along the product/supply chains. Collectively, they contribute 60% of China’s GDP and 80% of urban employment, and clearly need continued assistance from the government, financial institutions, business partners and communities in order to survive and recover.

Outlook for other countries

Even if China continues to show favourable trends, a more daunting question is whether other major countries can emulate its recovery. During the Great Depression of the 1930s, the damage to economies and societies was so acute and lengthy in part because governments adopted the wrong policies domestically and abroad: domestically, instead of stimulus there were austerity measures; and globally, trade barriers were erected rather than broken down.

The good news today is that governments in major economies rapidly launched extensive monetary and fiscal measures to support firms and households. In addition to these domestic measures, which can lead to problems and risks down the road, a powerful stimulus that does not have any (economic) side effects would be to eliminate the tariffs imposed on imported goods and services; even a temporary pause in restrictive trade policies would help firms, especially SMEs, and consumers immediately.

Nevertheless, reasons for concern include:

  • The much higher share of personal services in most OECD countries. Manufacturing accounts for nearly 30 percent of the economy in China and Korea, 20 percent in Germany, 15 percent in Italy, 11 percent in Spain and the US, and under 10 percent in France and the UK. As noted in relation to China, companies in this sector can resume more easily than in services.
  • Most, often small, businesses offering personal services have been forced to suspend trading because of the lockdowns and many will not survive.
  • The importance of tourism. Major destinations, at both national and regional level, can expect a big drop in income.
  • The scale of public debts at the start of the crisis (Italy is among the most worrying) will affect the risks of subsequent financial instability.
  • The extent of the lockdown and whether it was less intense in some regions or affected the entire country.
  • Changes in behaviour following the lockdowns: will demand for aviation, office working, and certain leisure activities return to ‘pre-corona’ levels? If not, will other activities expand to maintain aggregate demand?
  • With very small proportions of the population having been affected by the virus, fresh outbreaks, possibly requiring further quarantining, could occur.
  • Another factor will be the speed of recovery of global product and supply chains. Since firms, industries and economies are more interconnected, a breakdown in any key component or link will lead to some degree of breakdown of the entire chain. While some countries may have a strong incentive to repatriate ‘critical’ industries after the crisis, such relocation efforts are costly and take time to implement and overall economic efficiency may be compromised.
  • More importantly, during the recovery process the quicker the global chains can be restored – more likely if there is broad cooperation among firms and industries – the faster economies can be back on track for growth.

Verdict for the global economy

Much, will, in addition, depend on how successful policymakers are in delivering their stimulus packages. Taking all such factors into account, China is likely to be a ‘U’, and so are some East and Southeast Asian economies which have extensive trade with China, but there is a risk of ‘W’. Some service intensive European countries are most at risk of an ‘L’, and the US also risks ‘L’ for the same reason (unless the insurrection against State Governors being fomented by Trump prevails, though that could result in a ‘W’ or even a double ‘W’). The biggest question mark is over large developing countries where the virus has not (yet) had so severe an impact.

If most of the largest and developed economies can more or less contain the outbreak by the summer and start the recovery process during the third quarter of 2020, then a global ‘V’ recovery by the end of the year is possible. However, given the patterns of the second wave of the outbreak already observed in some Asian countries (Singapore), it is also possible that a second wave of outbreaks will occur in a number of large economies, and hence we will see a ‘W’, with the higher-than-trend growth phrase postponed until the first half of 2021 or later.

It is in the common interests of all to avoid an ‘L’ shaped recovery, and to do so, cooperation among all economies is vital. Are the European Council and the G20 listening?

Scotland’s Shifting Politics of the Covid-19 Crisis

Image © Scottish Parliamentary Corporate Body (Licence terms)

by Dr Kirsty Hughes
Director, Scottish Centre on European Relations

20th April 2020

As the Covid-19 crisis continues, the UK may be heading for one of the worst outcomes in terms of deaths across Europe. Criticism is rightly mounting of the UK government’s handling of the crisis, not least of the fatally lost weeks before lockdown on 23 March, and the inadequacy of testing capacity and of PPE supplies for the NHS, care workers and other front-line workers.

Yet the UK politics of this mis-managed crisis are curious. With health devolved, and considerable coordination taking place between England, Northern Ireland, Scotland and Wales, there has until now been rather little suggestion that any of the UK’s four nations could have taken a substantially different approach – albeit Nicola Sturgeon said last week Scotland might not take an identical approach on exiting from the lockdown.

But, so far, the growing criticism of the UK’s approach has been mostly targeted at the UK government, rather than asking whether the devolved administrations could and should have done something differently – and earlier – in the crucial early days of March (and also in February too).

Many Smaller European States Did Better

Impact so far has varied across the UK with its total of 16,060 deaths as of 19-20 April (a figure that mostly excludes care home deaths). England has been the worst hit by corona deaths, with 257 deaths per million of population, then Wales – 184 deaths per million, Scotland – 166 deaths per million, and Northern Ireland – 103 deaths per million. Many factors lie behind these differences (and much analysis will be done in the months ahead of that). London is and was, of course, a hotspot. And Scotland was a few days behind England in the spread of the virus. But overall the four nations of the UK were following the same, inadequate strategy.

In comparison, across Europe, countries are at different stages of dealing with the crisis – and have adopted different approaches not least different timings of lockdown, and different amounts of testing of their populations. But Scotland’s total of deaths so far does not compare well to many similarly-sized European states (with all the provisos about comparability of data and different stages of the spread of the corona virus).

Scotland, up to now, has fared worse than Ireland which has 124 deaths per million of population. More striking still are the Nordics: Norway has 31 and Finland 17 deaths per million, while Denmark has 61 per million (all as of 19-20 April). In fact, Scotland’s current position is similar to Sweden, with its less stringent approach to lockdown (and double Scotland’s population size), which has 156 deaths per million.

Clearly, other larger European states have been hit hard apart from the UK – Italy, Spain and France most notably while Germany with its different, high-testing strategy has a much lower 56 deaths per million. And some other smaller states have had high deaths too, notably Belgium with over 500 deaths per million – though this would come down by around half if only hospital deaths were included. But Greece – with twice Scotland’s population – has had just over a tenth of its deaths.

Shifting Politics

So different countries have had strikingly different experiences, so far, though all now face the very tricky, and vital, challenge of how to go about easing and exiting from lockdown to whatever the new normal will be. One of the striking aspects of the UK’s hesitation in the first half of March was the extent to which a range of organisations started to cancel events or initiate working from home policies – including events that were much smaller than the 500 person limit announced by Nicola Sturgeon on 12 March shortly before the UK government did the same. Civil society moved ahead of the politicians.

It is surely important to learn and understand some of the lessons from March now to inform Covid-19 strategy in the coming weeks. There may be several reasons why the Scottish government and other devolved administrations did not diverge noticeably from UK government strategy – despite health and education being devolved. Certainly, at first sight, it looks sensible to have a coherent, cohesive strategy across a state faced with such a public health crisis.

And the unprecedented economic damage of lockdown is one that the Scottish government may well not have wanted to trigger ahead of the UK, not least given that major economic bail-out policies do not, in the main, sit in devolved governments competence. Control of borders is not a devolved power either. But there could have been – but wasn’t – a public demand from the Scottish government for a two week earlier lockdown in early March; nor were any significantly faster actions taken at the time.

As criticism grows of the UK government’s decisions in March, it puts the Scottish government in a tricky position: they went along with those decisions, and did not criticise them at the time. Overarching responsibility may lie in London but the devolved administrations did not act as a pressure point for faster, earlier, more decisive actions. The Scottish government has been spared from much criticism in this context. This is, in part, as most focus has been on London but also as the Scottish Tories – while questioning some aspects of policy on care homes – won’t criticise a policy in line with the UK government, while SNP politicians will be loath to critique their own government.

Whether the UK government will manage an easing of the lockdown and management of the rolling corona crisis any better in the coming weeks and months is an open question. There appear to be splits in the cabinet over a more or less rapid route out of lockdown, with Boris Johnson, while still not back at work, apparently favouring a more cautious approach.

Nicola Sturgeon has said she will consider a differentiated approach to exiting the lockdown if that looks in Scotland’s best interests. Meanwhile, Scottish secretary Alister Jack has said the UK’s four nations must continue in lockstep. The lesson of the shifting politics of the crisis, so far, is that some differentiation could potentially be a plus (and would have been in March too). The tough challenges of managing testing and tracing, supplies of PPE, capacity of the NHS, and managing the extraordinary economic downturn need a clear and focused strategic approach. A pan-UK approach should not be a given for all elements of this – and indeed should not have been in March.

European identity and the plague

by Roger Casale
Founder, Secretary General & CEO, New Europeans

21st April 2020

“The plague was posting sentries at the gates and turning away ships bound for Oran.” Albert Camus, (1913-1960)

“Human it is to have compassion on the unhappy”  Giovanni Boccaccio (1313 – 1375)

Plague has been with us since ancient times. Pestilence has left its mark on our folklore, in art and in literature, on our collective memories and on the habits that still shape how we live today.

What is unusual about Covid-19 is that it is a truly worldwide phenomenon – a pandemic. Even the Spanish flu, the deadliest in history, only reached one third of the world’s population (although it still killed 50 million).

The impact of the virus will be a shared global experience, but the way we respond will vary region by region.

Continue reading European identity and the plague

Things will never be the same again – – how Covid-19 is re-shaping the future of Europe

by Roger Casale
Secretary General & CEO, New Europeans

15th April 2020

Reproduced with kind permission:
Can Europe survive the coronavirus? Roger Casale
OW Magazine,​ 15 April 2020 (Library of Congress: ISSN 2576- 2087)

There is an old joke about a census in the USSR. A man was asked where he was born: St Petersburg. Where he went to school: Petrograd. Where he lived now: Leningrad. Where he would like to live: St Petersburg.

After the corona virus, many may wish they could return to the familiar world they inhabited before the epidemic. But as the crisis deepens, that begins to look more like a dream than an aspiration.

Continue reading Things will never be the same again – – how Covid-19 is re-shaping the future of Europe

Covid-19, Corona Bonds and “Kicking the can down the road”

Eurogroup President Mario Centeno at the Eurogroup video conference on 9th April. Photo credit: European Union

by Dr Andrew Black
Senior Research Fellow at Global Policy Institute; Senior Research Fellow, Brunel Business School

17th April 2020

What I see is European construction drifting towards a free-trade zone, that is to say an English-style Europe, which I reject. If we do nothing, this will lead in 15 years to a break-up. I reject a Europe that would be just a market, a free-trade zone without a soul, without a conscience, without political will, without a social dimension.

Jacques Delors Interview (c. 16/17 October 1993), quoted in The Times (19 October 1993), p. 11

It is a curious thought that while Britain has opted to leave the EU, so it has managed to infect the EU with its own free market virus. A virus that Jacques Delors thought would lead to the collapse of the EU by 2008 – the year of the Great Financial Crisis (GFC). The EU, and more particularly the Eurozone, survived that crisis, only to limp on into the next one, caused by the Covid-19 virus.

As the various countries in the Eurozone (EZ) moved into lockdown mode, so they enacted a variety of national measures designed to alleviate the economic pain caused by Covid-19. A rapid survey of existing measures revealed that the sum total of designated fiscal measures to prop up the economy (including Germany, France, Italy, Spain and the Netherlands) amounts to around € 500 billion. This represents the addition of those measures announced as having some kind of financial ceiling. Most of these countries have also entered into what are open ended and in some cases unlimited commitments to subsidize the cost of wages and salaries, both for larger companies as well as for SMEs and for the self employed. These could amount to a similar total, suggesting that combined support on offer by EZ countries could be in the region of € 1 trillion. Before thinking that this looks like a generous sum, consider that the USA (federal government) has currently offered US$ 2.8 trillion (€ 2.57 trillion) to support personal incomes and company liquidity through the Covid-19 crisis. This is wrapped into a single piece of legislation, called the Coronavirus Aid, Relief and Economic Security Act, or CARES for short. This was passed on March 27th with bipartisan support by Congress, and shows that federations can act swiftly when needed.

Continue reading Covid-19, Corona Bonds and “Kicking the can down the road”