Below is the first edition of our daily update on the politics of the coronavirus epidemic. The analysis is focused on how selected national governments and the European Union (EU) are responding to the outbreak and its political and policy consequences.
National governments remain in the driving seat in the battle against the coronavirus. A case in point is Austria’s decision to reintroduce checks at its border with Italy today. Meanwhile, agreement on bold economic measures remains elusive for now. All eyes will, therefore, be on the European Central Bank’s reaction to the crisis on 12 March.
Outside the realm of monetary policy, proposals such as a (temporary) relaxation of state aid rules might be politically more promising than the hope for a bold fiscal stance in Northern Europe. Measures such as tax credits and public loans to businesses have the advantage of closely resembling what coordinated economies in the North have been doing in the 2008 economic crisis and today. This includes state subsidies for short-term work schemes. As these allow companies to hold on to their workforces, the focus on the supply side is evident, making the relevant EU law exemptions politically more palatable in the skeptical North.
A nation-wide lockdown came into force on 10 March, placing the whole country under public health restrictions. All non-essential travel has been prohibited until 3 April. Some of the northern regions are now calling for the closure of all non-essential economic activities.
The political situation remains calm despite the government’s chaotic and weak crisis-management. However, this is likely to be a temporary respite. Moreover, no real sense of national unity has emerged.
An economic emergency package worth around EUR 7.5-10bn should be unveiled on 11 March. A temporary moratorium on payments of mortgages, utilities, social security contributions, and various taxes will be introduced. Additional funding will be provided to social shock-absorbers to offer relief to both employed and self-employed workers.
The government’s response to the outbreak has been rather reactive. Following a drastic increase in reported infections, it decided on 9 March to activate “enhanced contention” measures targeting the areas with the highest transmission rates. It has suspended all educational activities for the next two weeks in the Madrid region (578 of the 1,204 total cases) and recommended firms to encourage employees to work from home. Areas of the Basque Country and La Rioja region are applying the same measures.
Measures to support quarantined workers were adopted today, 10 March. A package with additional economic measures will probably be announced on Thursday, but little clarity has been given on their exact content. The epidemic is in any case unlikely to change the prospects for the approval of the 2020 budget. Given the hurdle caused by Catalan politics, the government might renounce to propose a draft 2020 budget and just work on getting the accounts for 2021 approved in the fall.
The administration of President Emmanuel Macron is following a gradual approach to the outbreak. The country is currently in the so-called phase 2, with containment measures targeted at areas with a high number of cases and a nation-wide ban of public gatherings of more than 1,000 people. The government seems to be trying to delay the activation of phase 3 – which would lead to broader restrictions on free movement – to avoid having to paralyze the country for too long.
The government has moved fast on the economic front. Already in early February, it had approved a decree allowing anyone self-isolating to be eligible for sick pay. It also announced several additional measures on 9 March: a) increasing the compensation to employers who need to pay their employees 70% of their salary during periods of reduced working hours, b) delaying the payment of social contributions for those firms requesting it, and c) tax credits for specific companies. Beyond these formal measures, Economy and Finance Minister Bruno Le Maire has also called for banks to be flexible with the repayment needs of small businesses.
Despite the first two deaths from COVID-19 on 9 March, the fear of the virus is growing only slowly in Germany. Just as in 2008, during Chancellor Angela Merkel’s first term in office, the country is facing the prospect of global economic crisis with a grand coalition government in power. This latest challenge should provide the shaky partnership with a new sense of purpose, further increasing the odds that it will hold until the September 2021 elections.
As in 2008, many commentators are struggling to come to grips with the German skepticism towards anything that might resemble alarmism or panic. There are multiple reasons for this caution, from the time with which Germany seems to lag behind the heavier outbreak in Italy, to voters’ overall high levels of trust in their country’s institutional capacity.
Bewilderment about Germany’s calm is often closely correlated with hopes for German fiscal expansion. But even if the (medical) sense of urgency is likely to increase over the coming days and weeks, the starting assumption should remain that fiscal policy will stay on the carefully reactive side. As always, the political interpretation will be crucial. There is no reason to assume that even a severe virus outbreak would immediately overthrow the fundamental German belief in sound public finances. Quite to the contrary, it could further add to the idea that resources should be spent very carefully to ensure the country’s capability to react if things were to get worse.
Chancellor Rishi Sunak will present the budget tomorrow, 11 March. Initially, the plan had been to begin delivering on the Conservative electoral promise of “leveling up” Euroskeptic working-class constituencies in the North, many of which the Tories won from Labour. But the double whammy of recent floods and the virus outbreak are likely to call for more immediate measures first. At least, this might somewhat connect with the promise to spend more on social care, including the National Health Service.
The signpost to watch is what the outbreak does to the process of political realignment underway since the Brexit referendum. An economic downturn might further increase questions around how to fund the Tories’ electoral promises. Early attempts to finance them via tax hikes for property owners led to a pushback from the party’s more traditional base. In the context of an economic crisis, tensions in the new, uneasy voter coalition behind the Tories might increase further. This could add to the uncertainty over the nature of crisis response and the medium-term policy outlook in general.
The government is introducing sanitary controls at the border crossings with Germany and the Czech Republic as well as ports and train stations to prevent the spread of the disease. It also decided today to cancel all mass gatherings in the country.
The way the ruling Law and Justice-led (PiS) government handles the Covid-19 outbreak could affect the outcome of the May presidential elections, where incumbent Andrzej Duda is expected to face stiff competition from an opposition candidate in the second round. But constraints on public events will limit the scope of the presidential election campaign and likely benefit Duda, who has completed his re-election tour across all 380 counties.
Despite the pressure created by the outbreak to approve Florin Citu’s (National Liberal Party, PNL) cabinet in a vote of confidence that will take place on Thursday, 12 March, MPs are likely to reject his appointment. In this scenario, President Klaus Iohannis may nominate an independent candidate to lead a technocratic government that would have full powers to deal with the virus outbreak.