Below is the latest edition of our daily Europe coronavirus update. Please do not hesitate to contact us if you want to discuss any of the countries mentioned in more detail.
The number of reported cases of Covid-19 varies substantially across countries. This is explained not only by the geographical variation in the incidence of the disease but also by the number of tests that governments are running in each country. In other words, the mortality ratio is likely to be affected by countries’ approach to testing for the virus. The question now is whether health systems in Europe are ready to ramp up the number of tests executed and, ultimately, contain the spread of the disease – as South Korea seems to be doing.
Following yesterday’s videoconference between EU leaders, the European Commission announced it would be putting forward a “Corona Response Investment Initiative” worth EUR 7.5bn, which it claimed could be increased to EUR 25bn by redirecting unspent structural funds. It also said it would table proposals before the Eurogroup on 16 March to make sure state aid can be directed towards affected companies. Moreover, the Commission will detail how member states can make use of the flexibility of EU fiscal rules; it looks increasingly likely that several governments will resort to higher deficits to counter the negative impact of the virus. Fiscally more skeptical member states may be privately relieved if this slows down the calls for bold spending programs coordinated on the EU level. The slow political reaction leaves the 12 March ECB governing council meeting as the main event to watch.
The government has earmarked EUR 25bn (20bn to be provided by new debt) to shield the economy from the outbreak. Around EUR 12bn will be used for measures that will be outlined in a decree to be issued by the end of the week. The government will secure the required parliamentary approval today to deviate from a previous deficit-to-GDP target and raise it to just under 3% of GDP.
Meanwhile, the politics of crisis management are becoming more rancorous. Prime Minister Giuseppe Conte is under growing pressure to appoint a “crisis Tsar” and to tighten further the restrictive measures by banning all non-essential economic activity. Sensing an opportunity, the leader of the Lega Matteo Salvini is ramping up his attack against EU member states for ignoring Italy’s pleas for help.
Prime Minister Pedro Sanchez made his first public statement on the coronavirus outbreak yesterday, 10 March. He reiterated that a package of measures would be approved tomorrow, 12 March, which could include the deferral of tax payments for SMEs. Social Security Minister Jose Luis Escriva has also announced a scheme to compensate parents who cannot work because they need to stay home to take care of their children.
Meanwhile, Catalonia has decided to ban all gatherings of more than 1,000 people, showing how the central government is struggling to develop a common approach to outbreak containment across the country. The management of the outbreak is also increasingly being politicized. For instance, the fact that the PSOE-Podemos government adopted aggressive measures on Monday after allowing Women’s Marches to take place on Sunday has been strongly criticized by the opposition.
President Emmanuel Macron is expected to make a televised statement on the outbreak tomorrow evening. The government is still in phase two of its strategy, but it has been signaling phase three might be activated soon. Although the exact content of phase three measures remains unclear, efforts would shift from detection and isolation to the full mobilization of healthcare resources (including private) to attenuate the virus’s impact on the population. The government would probably also take gradual measures to contain the transmission of the virus, such as the closure of schools in some regions of the country or the imposition of public transportation restrictions.
The outbreak is also creating concerns about its potential effects on turnout in the first round of the municipal elections this Sunday, 15 March. The vote is, in any case, unlikely to provide a reliable measure of Macron’s political standing. His Republic on the Move (LREM) party was already expected to have a hard time making serious inroads on the local level, given the incumbency advantage of established parties and LREM’s lack of established local networks.
The overall sense of urgency is growing only slowly. One aspect that has begun to attract some public attention is the institutional structure of disease control in the country, which limits the federal government’s powers on steps such as banning large-scale public events. This power does not even lie with the 16 regional states, but with municipal health authorities. For now, there is, therefore, not even a country-wide approach to banning spectators from football matches.
Given the need for coordination (rather than imposition) in Germany’s decentralized political system, the first questions are being asked about Chancellor Angela Merkel’s (rather typical) absence from the public debate so far. Despite a joint appearance with Merkel today, Health Secretary Jens Spahn is publicly running crisis response for the government. As reflected in our graph, Germany has so far not even had a central registrar of all coronavirus tests conducted (i.e., only positive test results are being recorded). All in all, the anti-alarmist domestic approach to the looming crisis should act as a sign of caution for anyone speculating about quick and bold moves on the fiscal front.
The Bank of England cut its rate from 0.75% to 0.5% and pledged additional support for businesses before Chancellor Rishi Sunak presented his budget in the House of Commons today. The chancellor’s plan foresees GBP 30bn in extra spending to fight the virus, alongside a substantial increase in borrowing to enable greater investment.
Sick pay for those self-isolating and the promise to provide whatever funds may be required (alongside tax cuts for affected businesses) all fit well with the overall theme of the budget: the Tories catering to their new, formerly Labor-supporting voters in the north of England. To that latter end, investment in infrastructure and public services will be increased substantially, financed via extra borrowing.
Austerity has, therefore, come to an end as the key principle guiding the government’s policies. But for this to have a lasting (political) effect, it would have to continue for a sustained period of time, after a decade of austerity. Whether this will play out will also depend on the medium-term effect of the virus (and Brexit) on UK growth. The bigger question is hence whether the uneasy voter coalition backing the Tories would also hold if financing the “leveling up” agenda were to require more divisive choices in a scenario of anemic medium-term growth.
The Health Ministry imposed on 11 March a nationwide closure of all public and private educational institutions for the next two weeks. The Finance Ministry has also announced a preliminary package of measures to support businesses that have closed for more than ten days as a result of government-imposed measures. They include deferral of VAT payments, as well as tax and social security obligations for four months. A second set of measures is expected after the 16 March Eurogroup.
The government hopes that the escalating situation will lead lenders to revise the budgetary targets for this year. Prime Minister Kyriakos Mitsotakis noted in Berlin on Monday that the fiscal goals agreed under different circumstances might not be reached.
The government is stepping up containment measures. Today, Prime Minister Mateusz Morawiecki announced a two-week closure of all educational and cultural institutions, including nurseries, schools, universities, theaters, and museums. Parents remaining at home with their children will be entitled to special allowances.
In terms of economic response, the government is expected to introduce a special package of measures shortly. It will probably include various tax breaks for employers, loans and guarantees for businesses, and an expanded safety net for employees in troubled industries.
The General Commander of the Polish armed forces Jaroslaw Mika was diagnosed with Covid-19 after returning from an event in Germany. In the meantime, the leader of the opposition, Tomasz Grodzki, is facing criticism for having waited for three days before getting tested for coronavirus after returning from vacation in Japan and Italy.
Today, 11 March, the government declared a national emergency, which expands the range of possible response measures. Except for returning Hungarian citizens, all arrivals from China, Iran, Italy, and South Korea have been banned. Also, all universities are set close and must switch to remote lectures. Hungary has already strengthened its border controls, while Prime Minister Viktor Orban has seized this opportunity to link illegal migration (especially from Iran) to the spread of the virus.
The government is expected to adopt targeted sector-specific measures to support the economy in the coming days, which may require revisiting the 2020 budget. Before revealing any concrete measures, however, the Hungarian authorities will be gathering information on which sectors are most affected by the crisis. Some companies in the manufacturing sector have already been forced to curb their output due to supply chain disruptions.