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February 28, 2020

The EU's sheer complacency is unbelievable

The biggest threat to the future of the EU is not Donald Trump or a geopolitically ambitious China, but complacency. We saw that during the eurozone crisis, which only ended when the ECB intervened. We are seeing the same now in the discussion on border closures in the Schengen area. The EU has an instrument available to stem the spread of a disease and to save lives, but has decided not to use it. 

There will come a point, for sure, when it will no longer help to close the borders. But the one lesson we learned from China is that lockdown measures were effective even at the time when the disease was getting out of control in Wuhan. We are at a similar stage in Italy now. So, why do the Italian borders remain open? 

Giuseppe Conte gave us the revealing answer during his bilateral with Emmanuel Macron yesterday: once you close the border, it is not going to re-open any time soon. This is true indeed, but it tells us what his priorities are: it is to avoid the cost and inconvenience of border closure. And it ignores completely that the costs of inaction will ultimately be higher than the costs of border closures, both in terms of human life and economic impact. Keeping the borders open is therefore short-sighted and irrational. 

We are now at the phase of exponential increase in the spread of the virus. By this morning there were 650 infections in Italy alone. Germany reported 21 new cases last night. The carnival festivities seem to have been a source of contagion. 

By yesterday afternoon, the number of those infected in the whole of the EU had been only 477 cases. The European centre for disease protection and control in Stockholm now estimates that other EU countries will experience an explosion similar to Italy's.

FAZ quotes a senior European Commission official as saying that border controls are not the right answer. It would be wrong to deny an infected person to travel, and much better to agree a procedure between states. This astonishing complacency reminds us of the 2008 financial crisis. Some people argued then against bank rescues on the grounds that it would be much better to reform the system instead. We are back to the house-on-fire situation: when the house burns you should call the fire brigade, not discuss fire-safety policies. The priority surely must be to avoid the spread of the virus, not to protect symbolic edifices of European integration.

The UK’s approach to the crisis will be different. The numbers of infected people in the UK will also go up like elsewhere. But the UK is actively considering lock-down measures, like an obligatory closure of schools for two months, according to the UK’s chief medical officer. The UK is also considering bans of public gatherings and sport events. We know of companies in London that have already ordered their staff to work from home.

The World Health Organisation said no country will be able to protect itself from the virus entering it, but countries will need to decide whether they will accept the economic disruption or not. The Italian government is trying to contain the crisis by ring-fencing the hotspots, rather than larger areas. The Schengen borders are ideal lock-down perimeters because the infrastructure is already in place.

Inaction is not only the result of the in-built complacency that characterises the modern-day EU, but also a consequences of the political and economic weakness of governments. A closure of borders is a taboo for politicians who are fighting parties of the right. Years of fiscal austerity have rendered the Italian health system fragile. The political weakness of the Italian government is therefore a factor.  

As the head of the WHO mission in China was saying, the biggest danger is a false sense of security. Not everybody has the capacity to deal with the crisis as well as China did. The Italian response is not in the same league. And it looks like the rest of the EU is not much better.

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February 28, 2020

A game of blind man’s bluff, to be played for three months

So here is the UK’s post-Brexit negotiation document. The main shift is the explicit June deadline. This confirms our view that the UK is seriously planning for no deal. You need to give people, and not just government agencies, time to prepare.

We thought that the characterisation of the upcoming talks by Dennis Staunton’s of the Irish Times has it spot-on:

"The two sides disagree more on form than on substance... Yet for the EU form is substance."

These negotiations is not about trade but about power. The EU uses market access in its rawest form as an instrument to force a maximum degree of regulatory alignment. The UK wants the exact opposite.

Staunton makes the observation that both sides believe the other side will fold. This is certainly true of the EU. But we doubt that Johnson, Dominic Cummings or Davis Frost think the EU will fold. Some people in the Conservative party and the Tory media may say that the German car companies will intervene at the last minute, but they didn’t last time and they won’t this time. However, we believe that the UK government is genuinely ready for these negotiations to fail. Starting from where we are today, the two sides have boxed themselves into positions where they cannot easily fold, whatever the other side might think.

There is, of course, a compromise that is technically achievable. It would be based on firm level-playing field commitments with reference to international standards, like those of the international labour organisation or the Paris climate accord. We saw yesterday how a UK court used the Paris targets to declare the expansion of Heathrow airport illegal. 

But that view underestimates both the UK government’s intentions and the EU’s worst fears. The substantive problem is that there are areas in which the UK government wants to deviate from EU regulations, among them state aid to industry and data protection. Such deviations would be consistent with the government’s new industrial strategy. The EU’s negotiating goal is to prevent that from happening. 

Also, watch out for a coronavirus impact. If the EU ends up handling this badly, and a health crisis leads to economic crisis, domestic pressure on the UK government to seek alignment might be even less effective.

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