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April 02, 2020

Covid-19 and the return of the nation state - part eight of our series

Covid-19 has seen the return of the nation state as a primary actor. As the pandemic is raging through Europe, crisis management is left to member states. They are the reference point for our experience of lock-down. Unless the EU comes up with a plan that is both bold and relevant, we risk more chaotic beggar-thy-neighbour policies, not only to secure supplies but also when it comes to end the confinement. Damage to the EU could be irreversible.

This health crisis is a national moment. National health care systems are under threat, and nations have uniting experiences under lock-down. In some cases the reference is not even the nation state. In Germany health is the prerogative of the Länder, not the federal government. Their first crisis response was quick and messy, securing supplies by stockpiling and banning exports of protective gear to other EU countries. Germany later lifted its export ban, first only to crisis regions like Italy and then more generally, and offered hospital beds to Covid-19 patients from hard-hit French border regions. Still, there was hardly any coordination at the European level, nor was Europe mentioned once in Angela Merkel's emergency address. 

When it comes to health, the EU has no formal role, nor a legal basis to act. But there was and still is an opportunity for the EU to carve one out. Jacques Delors would have done so. Instead, the EU got lost in technicalities. European solidarity was reduced to what is possible, not what is desirable.

The immediacy and urgency of this crisis requires leadership to be responsive and fast, not bogged down by technocratic considerations. Emergency laws in the national context allow for a quick response. Governments have vast powers to act. Police and army can be mobilised to help with security and transportation. Financial help to companies and the unemployed is paid out at the national level. At the EU level there is nothing like this.

Member states remain divided over how to help each other, depending on their level of urgency as well as their fiscal capacity to act. After last week's disastrous EU council meeting, the leaders from Portugal, Italy, Poland and Spain accused the EU of not delivering on European solidarity. The coronabond was a breath of fresh air, but the proposal now appears dead on arrival without the support of Germany and the Netherlands, and without a willingness by the other nine to push ahead among themselves. A common unemployment scheme as advocated by Spain would be a game changer in the medium run. The European Commission short-term work scheme, to be launched today, may be a first step.

In the immediacy of this pandemic EU was not the main actor, but it could still do in the effort to end the lockdown. Imagine if Germany were to end its lock-down earlier than others. Would there not be pressure in other EU countries to follow suit, even if it were not safe for them to do so? There is a clear potential for the EU to act and define a common or at least a co-ordinated exit strategy. If the EU fails to live up to this role, we would end up with member states on different points in the curve of the pandemic. The EU would disappoint when it is most needed. And people would draw the logical conclusion that they need to fall back on the nation state. 

Once the heat of the crisis cools down, member states may also look back and rethink their supply chains. They just found out very painfully how dependent they were on imports of essential goods. Brexit trade negotiations will most certainly reflect the lessons learned in this crisis. Here, too, the EU may have to address issues of common concern for the single market and future crisis management. 

At the national level, what brought people together in lock-down may or may not last. National leaders got an immediate boost in confidence for acting decisively. Whether people still want their governments after this crisis is another matter. Remember Winston Churchill’s defeat by Clement Attlee in 1945? We are also likely to see more political momentum behind anti-globalisation movements and advocates of protectionism in member states. This is not a good for the EU to drop the ball.

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April 02, 2020

Politics of an L-shaped recovery

Call it an L or inverted J. If the economic recovery everybody seems to be expecting to start in Q3 is neither fast nor complete, we are going to find ourselves in a very different political scenario compared to today.

If, on the other hand, everything goes up as quickly as it went down, the only funding needed would be transitory: some combination of national fiscal policy, EU funds and ECB support would be enough to plug the gap. If that were our expectation, even we would not be arguing the case for a €1tr eurobond.

But, as we explained yesterday, that scenario seems at least questionable. Southern Europe will almost certainly miss an entire tourist season this summer. The Alpine countries will miss a winter season. No one in the right mind will ever go on cruise again. And teleconferencing and home working are there to stay. We will still have restaurants and pubs, but maybe not as many. 

How exactly the economic recovery pans out will have profound political effects in all the member states of the EU. We said recently that Armin Laschet, the CDU’s safe-pair-of-hands candidate, may be the beneficiary of the rise in CDU’s current poll ratings. But beware. The current numbers may not hold up in case of an L-shaped recovery. We noted an article by Friedrich Merz in Die Zeit. His views on the economic impact of the crisis are very similar to our own. He expects a big increase in company bankruptcies in Germany, and very high unemployment as a result. Many sectors will not return to pre-crisis production levels for many years. And the concomitant loss of disposable income will reduce consumption, and lead to structural shifts in consumption patterns as well. We talked yesterday in terms of creative destruction, whereas Merz talks only about destruction. Germany is no longer an economy that easily reinvents itself. Needless to say, this would not be a scenario where people would favour the political status quo. For Germany, it is the scenario in which Friedrich Merz takes over in the CDU. In that sense his prediction has an element of wishful thinking. In Italy, the far right would stand to gain from such a scenario. Maybe in France too. 

This is not a scenario in which the rejected coronabonds will return to the political agenda. Once the right is in power, they will not be asking for coronabonds. That chance will be gone. What a coronabond would do now is to insure against such a scenario, whereas a piggy-bank would not. 

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