May 20, 2020

EUROPE: The politics of lockdown exit strategies

BY Wolfango Piccoli, Andrius Tursa, Antonio Barroso, Carsten Nickel

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( 10 mins)

This week’s update includes analysis of how selected European governments are planning to wind down some of the economic measures adopted to counter the effects of Covid-19. Please do not hesitate to contact us if you want to discuss any of the countries mentioned in more detail.

Italy

Exit strategy: Businesses, including shops, bars, restaurants, and barbers, reopened on 18 May. Swimming pools, gyms, and sports centers will follow on 25 May. Citizens are now free to travel within their region. Nationwide travel will resume on 3 June, when EU tourists will be able to travel to the country without a mandatory 14-day quarantine. A robust test, trace, and track system is still not in place. The government’s decision to fix the price of surgical masks at EUR 0.50 has affected both their production and distribution.

Economic measures: Italy’s furlough scheme is expected to end in July. Meanwhile, the text of the long-delayed “Relaunch decree,” which was approved last week, was published on 19 May. It emerged that 98 regulatory measures are needed to implement the decree. Delays will hamper the impact of what was already a poorly designed package. The government will focus next on salvaging the summer touristic season and on accelerating major infrastructure projects to support economic recovery. The latter initiative is unlikely to make any meaningful difference in terms of kick-starting massive projects.

Political context: The unwieldy governing coalition has essentially lost control over the lockdown exit agenda. This is mainly due to intra-coalition squabbling, pressure from business groups, and unilateral moves by regional governments. The failure to provide confidence and visibility beyond the short-term meant that around 30% of businesses have decided not to reopen.

Spain

Exit strategy: The government will announce this week which areas of the country will transition into Phase 2 on 25 May. Under the second stage of lockdown exit, malls will be reopened, and restaurants will be able to host customers indoors (albeit with social distancing limitations). Meanwhile, the government has made the use of face masks compulsory in public spaces, and the regions have hired additional staff to do human contact tracing. No precise figures are available about the exact amount of staff devoted to the task, however.

Economic measures: Trade unions and employers agreed in early May that short-term employment schemes would be renewed only on a case-by-case basis beyond 30 June. However, the government has suggested that it would extend them beyond that date if a second wave of infections were to occur. As part of the deal with Ciudadanos to extend the state of emergency (see below), the administration of Prime Minister Pedro Sanchez will also extend the deadline for tax payments. The government has also committed to speeding up the payment of subsidies under short-term employment schemes, which have been slow to reach the beneficiaries.

Political context: The Congress of Deputies ratified today the fifth extension of the state of emergency. The Sanchez administration was able to rely on the support of Ciudadanos in exchange for limiting the extension to 15 days instead of a month as initially planned. Under the new deal, the government will have to ask for another extension before the new one expires on 7 June. Ciudadanos’ increased influence during the lockdown exit process does not necessarily mean the party will eventually support the “recovery budget” the government is expected to adopt in the fall, however.

France

Exit strategy:Lockdown exit started on 11 May, although the state of emergency has been prolonged until 10 July. The government will decide in the coming days on whether the necessary conditions are in place to advance to phase two of lockdown exit. Under stage two, which is expected to kick in on 2 June, public transport is expected to function at full capacity. As for contact tracing, the government is still expected to unveil its app on 2 June.

Economic measures:More than 12 million workers are currently subject to the short-term employment scheme approved by the administration of President Emmanuel Macron at the outset of the pandemic. The government estimates that the bill of paying workers’ salaries amounts to EUR 26bn. Given concerns about the ballooning deficit, Labor Minister Muriel Penicaud has said that the scheme will be gradually wound down from 1 June. Firms will be able to continue using short-term working but will have to start assuming a larger share of the costs. The government’s decision is also motivated by fears that the scheme might be leading firms to delay the resumption of their activities.

Political context: The expected defection of several MPs of the ruling Republic on the Move (LREM) party materialized this week, leaving Macron one seat short of an absolute majority in parliament. As previously explained, however, the government will be able to rely on the centrist Democratic Movement (MoDem) party to continue passing legislation. Meanwhile, Prime Minister Edouard Philippe is meeting political party leaders this week ahead of deciding whether to schedule the second round of the municipal elections for the end of June.

Germany

Exit strategy: Regional states continue with gradually opening up their economies. The wait for the contact tracing app continues, but the relatively positive experience with human contact tracing in the decentralized system of local district health administrations (in combination with overall high testing capacity) probably renders the app a helpful addition rather than a significant turning point.

Economic measures: The bulk of economic support measures were from the beginning designed to run until the autumn or even year-end. Given the cost amassed so far, and the collapse in tax revenue on the horizon, the government is looking to introduce yet another special budget this year. Having focused on support for the time of the lockdown so far, the government will in June turn to a stimulus package to assist with the reopening of the economy.

Political context: The design of the stimulus plan (and especially the role of taxation within it) could turn out to be more contested than the process of setting up lockdown support measures. One reason is the continued overlap of pandemic politics with the question of the Merkel succession next year. Another driver is the implicit consensus that Germany weathered the crisis relatively well because of its initially solid fiscal position. That, in turn, already raises questions on how (rather than whether) to return to sound public finances after the crisis – and whether, for instance, high earners should contribute more to that effort once it begins.

United Kingdom

Exit strategy: The debate about the reopening of schools continues, with perhaps wider consequences for the service-driven UK economy. Large chunks of the workforce will find it difficult to return to their jobs as long as schools have not yet reopened, but resistance among teachers and local councils remains strong. With the launch of the UK-built, centralized contact tracing app delayed beyond the envisaged start date of 1 June, it appears that the UK will instead continue to open up its economy only very gradually.

Economic measures: Key economic support measures such as the furlough scheme will be extended until October. The furlough scheme alone is estimated to cost some GBP 14bn monthly. As the chancellor is no longer expecting a quick economic bounce back, and at least some sectors have started to reopen, he has also indicated that the scheme’s generosity would be gradually reduced from the current 80% of an employee’s income covered.

Political context: The campaign to convince people to stay at home and protect the health system seems to have been so successful that concerns are now mounting over the government’s ability to engineer political support an exit from the lockdown. Public support for a very cautious exit remains high, and the ability to negotiate between different groups – from teachers to small business owners – is already being tested. Given the magnitude of the ongoing change in UK party politics, uncertainty remains elevated.

Greece

Exit strategy: The third stage of the lockdown relaxation was launched on 18 May. Shopping malls and a range of stores reopened, while junior high school pupils also returned to classes. Movement is also now allowed within the mainland. The government has also decided to bring forward by a week the reopening (25 May) of cafes and restaurants. The Mitsotakis administration will focus next on getting the tourism sector up and running again.

Economic measures: Athens is due to unveil the next wave of support measures on 20 May, taking the total value of interventions to a reported EUR 24bn (around 13% of GDP. The measures are expected to include VAT reductions in the foodservice and hotel accommodation sectors and lower tax prepayments for businesses. The furlough scheme is likely to be extended into June by using EUR 1.4bn from the European Commission’s SURE program.

Political context: According to a recent MRB opinion poll, New Democracy has a 19.7-point lead over main opposition SYRIZA, with 70.6% of Greeks approving of the way Prime Minister Kyriakos Mitsotakis has handled the crisis. The PM is expected to resist calls from some party officials for snap elections to capitalize on ND’s big lead in the opinion polls.

Poland

Exit strategy: The government advanced to stage three (out of four) of its exit strategy on Monday, 18 May, which allows the reopening of indoor restaurants, beauty services, and eases the restrictions on public transport, events, and public gatherings. The last stage is expected to commence on 1 June, which should see the renewal of domestic flights as well as the partial reopening of sports and entertainment facilities. Various sanitary restrictions will remain in place beyond that date, while regions with a higher number of cases – such as Silesia – may be slower to reopen. Border controls and restrictions on most international flights are set to remain in place till mid-June.

Economic measures: On 15 May, the parliament adopted the third package of economic support measures for the self-employed and the most-affected affected sectors. Prime Minister Mateusz Morawiecki also revealed the cabinet’s intentions to hike unemployment benefits and introduce a new three-month allowance for the unemployed.

Political context: Small business owners are pressuring the government to reopen faster and step up support for the SMEs. A public protest in Warsaw over the last weekend saw over 380 demonstrators detained and the use of tear gas by the police. Meanwhile, opinion polls show that the “rally around the flag” effect is dissipating for President Andrzej Duda, the ruling Law and Justice’s candidate in the upcoming presidential vote. This may prompt the government to roll out new social and economic support measures.

Hungary

Exit strategy: The government started loosening lockdown measures in the capital Budapest and the surrounding Pest county on Monday, 18 May, two weeks later than in other parts of the country. This entailed lifting restrictions on business operating hours, reopening of outdoor restaurants, museums, playgrounds, and parks. Food stores and pharmacies must still keep the morning hours reserved for senior citizens. Meanwhile, indoor restaurants and hotels are now allowed to reopen outside Budapest.

Economic measures: Some of the first support measures – most notably the waiving of payroll taxes in the affected sectors – expire at the end of June. Companies can also apply for support under the “Kurzarbeit” scheme up to 30 days after the constitutional emergency ends (expected in late May/early June). In the meantime, the government is continuing to support various projects and sectors of the economy through its HUF 1,345bn (EUR 3.8bn) “Economy Protection Fund.”

Political context: Prime Minister Viktor Orban (Fidesz) said that a proposal to end the government’s extraordinary powers would be submitted for parliament’s consideration in late May unless the epidemiological situation in the country worsens. The government might use the lifting of the state of danger to discredit its critics at home and abroad. Meanwhile, even without the emergency powers, Orban will retain dominance of Hungary’s political scene.

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