May 27, 2020

EUROPE: The politics of exit strategies

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

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( 11 mins)

Below is this week’s update on how selected European governments are handling lockdown exit and their economic policies to counter the economic fallout from 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: The government will determine this week if the current restrictions on travel between regions will be lifted as planned on 3 June. However, Piedmont and Lombardy may have to keep travel limits in place for a few more weeks as these two regions account for around two-thirds of new coronavirus cases in the country. The borders are also likely to be opened on 3 June for EU travelers. The testing of the tracing app “Immuni” will start on 1 June. If successful, it will be rolled out nationwide in mid-June.

Economic measures: The parliamentary process for the approval of the “Relaunch decree” started on 26 May. This could take up to two months. Meanwhile, the government’s next initiatives will be aimed at reducing red tape and accelerating major infrastructure projects of strategic importance, from schools, railways, prisons, and council housing, to disaster risk reduction for extreme weather events. The latter initiative is unlikely to make any meaningful difference in terms of kick-starting massive projects.

Political context: Tensions within the governing coalition are likely to increase over the next few weeks as the economic impact of the crisis will become more manifest. The intense electoral cycle (the first round of elections in seven regions and 1,147 municipalities is likely to take place in late September) after the summer will soon become a major distraction and a further source of intra-coalition quarreling. Each party will be tempted to harden its stance on key policy areas to maximize its electoral appeal towards different segments of the electorate.

Spain

Exit strategy: 47% of the country entered phase two of lockdown exit on 25 May, while the largest metropolitan areas such as Madrid and Barcelona were allowed to transition into phase 1. The administration of Prime Minister Pedro Sanchez will have to decide on when to proceed with the next stage of lockdown exit within 15 days. Meanwhile, the government has decided that the obligation for every foreign visitor to isolate during 14 days will be lifted from 1 July.

Economic measures: After many delays, the government is expected to approve a basic minimum income this Friday, 29 May. The new scheme will provide financial assistance to around 850K households based on their income and their family situation. The total estimated cost of the new program, which is expected to be rolled out in June, will be around EUR 3bn. On the labor front, a significant controversy erupted last week when the government signed a deal with separatist Basque party Bildu in which it promised to repeal the 2012 labor reform in exchange for Bildu’s support for extending the state of emergency. However, the government is unlikely to introduce significant changes to labor market regulation, given the limited support for such an outcome in parliament.

Political context: Last week’s close parliamentary vote on the extension of the state of emergency has raised doubts about the ability of the Sanchez administration to get another extension decree approved before 7 June, when the current one expires. The government might try to shorten the duration of the next extension – which is expected to be the last – or limit its territorial scope in order to obtain enough parliamentary support in the next vote.

France

Exit strategy: Prime Minister Edouard Philippe will announce on 28 May at 4pm local time the guidelines for the next phase of lockdown exit, which is expected to kick in on 2 June. The government will also communicate whether the four departments currently classified as “red” (Grand Est, Bourgogne-Franche-Comte, Hauts-de-France, and Ile-de-France) will see further relaxation of lockdown rules. Border restrictions are unlikely to be lifted before 15 June, however.

Economic measures: President Emmanuel Macron announced on 26 June an EUR 8bn package to support the automobile industry, the majority of which (EUR 5bn) will be provided to carmaker Renault as a loan guarantee. The government will also devote EUR 1bn to incentivize the purchase of electric cars. Car companies are expected to make investments in exchange for the state’s support. Moreover, the government will mobilize EUR 1bn to support the production of cars in France, with specific funding lines dedicated to research and development.

Political context:The government recently announced that the second round of the municipal elections, which was postponed due to the pandemic, will finally take place on 28 June. As previously explained, the ruling Republic on the Move (LREM) is not expected to do well in the poll given its lack of local political networks and the substantial electoral advantage of incumbents. The race in the city of Le Havre will be one to watch as Prime Minister Edouard Philippe could lose to a left-wing candidate, which would raise questions about whether he still has enough political clout to remain at the helm of the government.

Germany

Exit strategy: For one final time, social distancing measures have been extended Germany-wide until the end of June. As of July, however, each of the 16 regional states will chart out its way forward. Regional leaders have made it clear that no further meetings are being planned with Chancellor Angela Merkel, who had continued to lobby for a continuation of Germany-wide social distancing rules.

Economic measures: Individual ministries are pitching their ideas for a stimulus package expected for June. These reach from one-off payments to families with children to support for research-intensive businesses. Support for the automotive industry is also being discussed, as well as the degree to which this should be linked to environmental targets. At the same time, the state’s involvement in flag carrier Lufthansa looks set to be critically examined by competition authorities in Brussels.

Political context: As the pandemic seems to abate, regional state leaders are clear that they are no longer willing to involve the federal government in their decision-making. This has led to public criticism but also reflects the success Germany has so far had with its traditionally decentralized approach of relying on local institutions for the fight against the virus. The return to the normal division of labor between Berlin and the regional states on health policy means that the focus of Angela Merkel’s government will now turn to stimulus at home and in Europe, where Germany will take over the presidency of the Council of the EU on 1 July.

United Kingdom

Exit strategy: The government is planning to allow non-essential shops to reopen as of mid-June. At the same time, plans for a gradual reopening of schools, envisaged for 1 June, remain contested amid fierce opposition from teachers’ unions. Meanwhile, the government so far seems to have hired only a fraction of the 18k human contact tracers promised for May, and the start date for the contact tracing app has been delayed to some point later in June.

Economic measures: Economists are divided over the medium-term impact of the pandemic on the UK economy and state coffers. In the more immediate term, however, the government keeps preparing for new measures that might become necessary. The chancellor’s next initiative is a plan for direct state support or even involvement in strategically important companies that might otherwise go bust. This is not only unusual for the UK economic policy debate but also highlights the importance of state aid rules as a potential stumbling block in the ongoing talks about the future relationship with the EU.

Political context: Continued concerns over tracking and testing capacity continue to force difficult decisions at a time of ongoing change within political parties. The speed at which the process of change continues is reflected in the chancellor’s latest plans for targeted state support to companies. This policy would, until recently, have been considered highly unlikely for any UK government and probably unthinkable for a Conservative cabinet.

Greece

Exit strategy: The fourth stage of lifting the lockdown restrictions was initiated on 25 May, when restaurants and cafes reopened. Restrictions on travel to and from the islands were also lifted. Year-round hotels and campsites are due to open on 1 June, followed by summer season hotels on 15 June. Prime Minister Kyriakos Mitsotakis has indicated land borders will open by mid-June and that tourists will be able to fly to Athens International Airport from 15 June. Direct international flights to and from the islands will resume on 1 July.

Economic measures: Last week, Mitsotakis set out the next phase of the government’s economic recovery plan, taking the total budgeted measures and guarantees to EUR 24bn. This will include wage and mortgage subsidies, VAT reductions, and the refunding of tax pre-payments to businesses. The government also presented a plan dubbed “Restart Tourism,” including a roadmap for reopening the hospitality sector and international air connections. The measures included in the package underline the government’s determination to open Greece to tourism as soon as possible, and to retain and even boost employment by encouraging season hires in the sector. This is a strategy that is not without its risks, both on the economic and the healthcare side.

Political context: SYRIZA continues to accuse the government of not being bold enough in its economic response. The main opposition party presented this week its plan for supporting businesses and employers, which would cost EUR 13.4bn and is based on greater wage subsidies, deferred taxes, and a holiday voucher scheme.

Poland

Exit strategy: The last (fourth) stage of the exit strategy will commence on Saturday, 30 May, with the lifting of restrictions on restaurants, cafes, various retailers as well as religious services. Sports, cultural and entertainment facilities (except night clubs) can restart their activities on 6 June. Events with up to 150 people will be allowed as well, but social distancing and sanitary requirements will remain in place across the country. Border controls and restrictions on most international flights will be in effect at least until 6 June.

Economic measures: This week, the parliament will consider the fourth Covid-19 economic support package, which is expected to set new provisions for remote work, and introduce economic downtime, allowing companies to cut employee salaries or reduce their workload. It will also extend tax benefits and state co-financing of wages. Moreover, the legislation will restrict foreign (non-EU/EEA) investment into specific Polish companies and sectors for a period of 24 months.

Political context: A further easing of Covid-19 restrictions and the new economic support measures are expected to reduce the probability of public protests. However, the government faces a risk of premature reopening as the number of new infections in Poland has not declined significantly in recent weeks. Meanwhile, the opposition Civic Platform is attacking the government and is initiating votes of no confidence for three cabinet members, including Health Minister Lukasz Szumowski (independent).

Hungary

Exit strategy: The gradual easing of restrictions continues. Restaurants and cafes in Budapest will be allowed to reopen their indoor areas starting Friday, 29 May. Schools, kindergartens, and daycare facilities are set to partially reopen from Monday, 1 June. Also, traveling restrictions (mostly for business) to/from Austria, the Czech Republic, Germany, Poland, Slovakia, Serbia, and South Korea have been partially removed. The obligation to wear masks in designated places (such as shops or public transport) remains in place, while morning hours in pharmacies and grocery stores are still reserved for senior citizens.

Economic measures: The parliament is codifying economic support measures into relevant legislation, as various benefits announced by government decrees will lose validity upon the end of the state of emergency. In the meantime, foreign (non-EU/EEA) investment in Hungary’s strategic companies and sectors will require the government’s approval at least until the end of 2020.

Political context: Yesterday, 26 May, Prime Minister’s Office submitted to parliament draft legislation on lifting the state of emergency. While there is no deadline for the consideration of the bill, the government expects the parliament to pass the legislation within the next two weeks, leading to the lifting of the state of emergency on 20 June. In the meantime, the opposition is seeking to launch a parliamentary inquiry whether the government’s actions in freeing up hospital beds for Covid-19 patients were excessive and resulted in any casualties.

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