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April 07, 2020

Austria and Denmark - first to exit after Easter

Austria and Denmark are the first countries with concrete plans to exit lockdown. Both will start to relax confinement measures after Easter, gradually returning back to normal by July or August, with big public gatherings last on the list. Both countries were early with their lockdown in the second week of March, and achieved low levels of new infection rates and death cases after three weeks.

Even so, relaxing the lockdown risks a new infection wave. Japan and Singapore have seen infections rising again as they returned to normal. For political decision makers, the question boils down to their risk aversion, how well they can target and control the spread of the virus, and how they value the costs for the economy and society as a whole. There are also warnings from experts that, if lockdown is too strict, it gives rise to another infection wave in autumn when the economy is just about to start again. To avoid such a double dip must be one of the priorities in the exit strategy.

Interestingly, in their exit plans Denmark starts with schools but Austria with small businesses. In Austria small shops will be permitted to open again from April 14, as well as large DIY stores and garden centres. Restaurants, hotels and schools may be able to reopen in mid-May, though that decision will be assessed at the end of April. Strict rules about masks, social distancing and the number of people allowed into a store at any one time will remain in place. There are high penalties for non-compliance. Public events may resume in July if numbers are good enough.

Denmark starts by opening up schools gradually, starting with kindergartens and primary schools opening from April 15 and middle and high schools waiting until May 10. They are in talks with business and trade unions for a time plan to resume their activities again.

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April 07, 2020

All change in the UK

The news, in the UK and elsewhere, is now focused very much on Boris Johnson’s admission to the intensive care unit of St Thomas’ hospital in central London. As the UK is awaiting news, one important political shift has taken place in the last few days. The Labour Party has a new leader, Sir Keir Starmer, and a new shadow cabinet. Some of Corbyn’s staunchest henchmen have been removed from positions of power. Ed Milliband is back in the shadow cabinet. We think it would be wrong to describe Starmer’s new team as a return to the past. There are some formidable figures on the team, like Anneliese Dodds as shadow chancellor and Lisa Nandy as shadow foreign secretary.

Beware of any long-term forecasts and lazy historical analogies. After its crushing defeat in 1983, the Labour party needed 15 years and three elections to get back to power. In today’s more volatile times, we cannot rule out that Labour goes from electoral humiliation to triumph in a single term. It is not what we expect to happen, but the Tories and their supporters would be mistaken to take comfort in their current 80-seat majority. 

Starmer is not without problems. Among the leadership candidates, we considered him the least likely to regain Labour’s lost voters in the North. As the party’s former shadow Brexit secretary, he was leading the fight for the second referendum. And while he now seems resigned to Brexit, he said he would not rule out a future referendum for re-entry. It is therefore not clear that he is well-placed to heal his party’s internal divisions over Europe. 

Starmer built up his credentials as a human rights lawyer. There is a story that the male lead character of Bridget Jones is based on him. Starmer was head of public prosecution before Jeremy Corbyn enticed him with a frontline shadow cabinet job. Starmer definitely has a wider appeal than Corbyn. Here is a clear parallel in the transition from Michael Foot to Tony Blair, except this time the transition is immediate, not via two other leaders in between. 

A big uncertainty is the future of Johnson himself. The Tories have no other leader in waiting with the same political reach as his, with the same strategic mindset, and with the ruthlessness to let an adviser like Dominic Cummings run rough-shod with the civil service and other ministers. The Tory cabinet is not a group of particularly impressive politicians. Dominic Raab, the foreign secretary who now deputies as prime minister, and Michael Gove, are politically not even in the same league as Starmer. Rishi Sunak, the new chancellor, seems impressive, but we are really struggling to identify anybody else.

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April 07, 2020

Eastern Europe’s unnoticed economic shock

As the EU is looking to shore up support for Italy and Spain, don't forget central and southeast Europe. These countries face a massive economic shock as the consequence of lockdowns elsewhere, with unpredictable political consequences that could threaten the cohesion of the EU, warns Andreas Mihm in the FAZ. 

Compared to Spain or Italy the numbers of Covid-19 cases are still low in central and southeast Europe. The pandemic has not run its course yet, however, and not many are tested in these countries. Their health care systems are relatively weak even without Covid-19, as many trained nurses and doctors went to work in better-paying countries like Germany or Austria.

There are knock-on effects of the lockdown in western European countries too. Mobility of labour in the single market came to a halt with various quarantines and border closures. Many seasonal workers returned to their home country with no income, adding to the people who need to be fed or even cared for. Bulgaria already appealed to its citizens abroad to sit the lockdown out where they are rather than coming home.

A massive hit is coming from the car industry. South-eastern Europe is a hotspot for the production of cars and car components. Romania, Slovenia and Serbia have well-established networks of component suppliers for all major car manufacturers in Europe. Bulgaria, Macedonia, Croatia, and even Moldova or Bosnia and Herzegovina have clusters of European car component industries.  

With the lockdowns, western European countries like France and Germany stopped or slowed down significantly their car manufacturing. Their employees get compensated by the state via partial unemployment schemes. This is not an option for south-eastern European countries. Supply industries in Romania or North Macedonia have no funds to fall back on, and their governments cannot simply offer a stimulus package in the magnitude of 10% of GDP that would be required. Their central banks did their bit to buffer the shock, pumping money into the economy and depreciate the currencies by up to 15%. The main burden, though, remains on the fiscal side.

Poland, Czechia, Hungary or Slovakia may have low debt levels, but they still might find it difficult to raise enough money for a stimulus to prevent their economy from tanking or their political systems from turning against the EU. About 30 years after the fall of the iron curtain, democratic instincts are still weak while corruption and a tilt towards nepotism are still prevalent. Emergency laws are already being used to implement drastic measures to orchestrate its response to Covid-19. Whether the sometimes strong response is appropriate at their current levels of infection is already questionable. And in the region a war economy does not only mean re-orienting production from computers to masks. In Hungary it also meant that Victor Orbán sent its military as control teams into 100 companies, ranging from water to IT suppliers.

Once this pandemic is over and the fear of contagion abates, expect a new wave of discrimination and blaming to take its place. There is no easy solution, and the muddling-through of the past decades won't help. Will there be enough courage in the EU to lead out of this crisis with integrity, not compromising on its values? We are not hopeful.

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