Teneo logo

June 3, 2020

EUROPE: The politics of exit strategies and economic support measures

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

Share on twitter
Share on whatsapp
Share on facebook
Share on linkedin
Share on email
Share on reddit

Listen to our reports with a personalized podcasts through your Amazon Alexa or Apple devices audio translated into several languages

( 10 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 ban on travel between regions was lifted on 3 June despite the lack of a robust “test, trace and track” system. On the same day, the country’s borders were also opened to EU travelers in an attempt to rescue the tourism industry, which is worth around 13% of GDP. Social distancing rules and a ban of large gatherings remain in force. The usage of a mask is compulsory on public transport. The selected tracing app is currently being tested in a few regions.

Economic measures: The government is under growing pressure to quickly deliver measures that could boost the economy as the country continues to ease lockdown measures. The 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. Similar moves in the past have not made any meaningful difference in terms of kick-starting massive projects.

Political context: Prime Minister Giuseppe Conte will outline his government’s recovery strategy in a speech at 6pm (local time) on 3 June and repeat an appeal to put aside the country’s political divisions. Conte’s appeal will be disregarded by most of the opposition parties, regional governments, and business groups. It is highly doubtful that the premier will manage to present any realistic plan to support the economic recovery. Such a plan currently does not exist. 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 quarreling within the governing coalition.

Spain

Exit strategy: The government will decide this week on which regions will enter phase three of lockdown exit on 8 June. Under the recently revised rules, people will be able to move between provinces and regions that are under phase three. Parliament will ratify today the last extension of the state of emergency, which will be in place until 21 June. The government is expected to approve on 9 June a decree to regulate the last stage of lockdown exit.

Economic measures: The administration of Prime Minister Pedro Sanchez has still not given any details about its economic recovery plans. However, several members of the government have suggested they will work on an “investment and reforms” plan that will be eventually submitted to the EU to obtain funds from the Resilience and Recovery Facility recently proposed by the European Commission. The scheme will not be in place before the end of the year, which raises concerns about the government’s ability to support those industries that are suffering as a result of the pandemic.

Political context: Sanchez will obtain a large majority in parliament today to approve the sixth and last 15-day extension of the state of emergency thanks to an agreement with disparate parties such as Ciudadanos and the secessionist Republican Left of Catalonia (ERC). The vote is the last major parliamentary hurdle for the PSOE-Podemos minority coalition during lockdown exit, with the next signpost being the 2021 budget to be presented in September. If Sanchez is unable to get next year’s accounts passed in parliament, the risk of early elections in early 2021 will increase significantly.

France

Exit strategy: Most of the country saw a significant relaxation of lockdown rules on 2 June. Aside from the reopening of most businesses, the limitation for individuals not to travel more than 100km from their home was lifted. However, the Paris region has been classified as “orange,” which means it will continue to see a slower easing of restrictions. France is expected to reopen its borders from 15 June.

Economic measures: The debate on how to fund the country’s recovery plan continues to rage on. While pressure is building on the government to adopt some kind of tax on high earners, Finance Minister Bruno Le Maire has suggested that re-introducing a wealth tax would not bring much revenue to the state. Meanwhile, the government will present on 10 June the third amendment to this year’s budget to approve further economic support measures.

Political context: Recent opinion polls show that President Emmanuel Macron has managed to stabilize his approval ratings at around 35-40%. More interestingly, support for Prime Minister Edouard Philippe has increased to around 50%. Philippe has been the most visible figure of the government during the management of the outbreak. His newly regained popularity will make it harder for Macron to replace him in a potential cabinet reshuffle to regain political momentum ahead of the 2022 presidential election.

Germany

Exit strategy: The 16 regional state’s education ministers have agreed on a framework for reopening schools. The goal is to reopen primary schools in all states at least ahead of the summer vacations. Respective agreements will be required if there is to be a Germany-wide approach to ending regional lockdowns. Still, wider coordination beyond education policy is likely to remain the exception rather than the rule, as the 16 states are firmly in charge of their own regional rules.

Economic measures: The coalition government is still debating the exact shape of a stimulus package that might end up exceeding the EUR 100bn threshold. Support for the auto industry (beyond electric and hybrid mobility), as well as plans for a rescue fund for over-indebted municipalities, are still contested between coalition partners.

Political context: Finance Minister Olaf Scholz and Bavaria’s state PM Markus Soeder are probably the biggest winners of the crisis so far. There is hardly any doubt that Chancellor Angela Merkel will now serve until the end of her term in autumn 2021, but the crisis has benefitted those of her potential successors who have positions in government. The medium-term signpost to watch is the December election of the next leader of Merkel’s Christian Democrats.

United Kingdom

Exit strategy: The gradual reopening of schools and shops is underway in June, but strategies differ between England, Wales, Scotland, and Northern Ireland. Testing and tracing capacities continue to attract criticism, especially as the contact tracing system was overwhelmed within hours of its start.

Economic measures: There is an increasing expectation for a mini-budget statement in early July. The chancellor might focus on support for skills and training programs to limit the effect of the expected rise in unemployment once the furlough scheme comes to an end. Infrastructure and technology investment could be additional focal points.

Political context: Virtual meetings of MPs in the House of Commons have come to an end, but there is not yet any indication when the cabinet will return to in-person meetings. At the same time, polls suggest a substantial deterioration of public trust in the government. As the more immediate phase of fighting the pandemic is coming to an end, the signs are, therefore, that political contestation will re-increase.

Greece

Exit strategy: Primary schools, as well as nurseries, reopened on 1 June along with year-round hotels and catering businesses as part of the fifth stage of easing the lockdown. The government also announced on Friday a list of 29 countries that will be able to have direct flights to Athens and Thessaloniki from 15 June.

Economic measures: As of 1 June, the VAT on a range of goods and services, many linked to the tourism industry, has been temporarily reduced from 24% to 13%. Social security contributions are due to be reduced by 0.9 percentage points this month, and reports suggest Prime Minister Kyriakos Mitsotakis may announce a further reduction of around one percentage point in September. The government is due to launch on 15 June a EUR 850 million wage subsidy scheme that is due to run until mid-October.

Political context: The government is portraying the European Commission proposal for a recovery fund as a significant boost for Greece and a victory for the Mitsotakis administration. If the proposal moves ahead and Greece is eligible to receive the proposed EUR 32bn, New Democracy believes this will help cushion the blow from this year’s downturn and leave enough fiscal space for the center-right party to implement much of its economic agenda, especially tax cuts. This is seen as removing any doubts about possible snap elections later this year.

Poland

Exit strategy: The last (fourth) stage of the exit strategy commenced on Saturday, 30 May, with the lifting of restrictions on restaurants, cafes, various retailers as well as religious services. Sport, cultural and entertainment facilities (except night clubs) are set to restart their activities on 6 June. Social distancing and sanitary requirements remain in place across the country. Domestic flights are restarting today, 3 June, while borders are expected to reopen by mid-June. Schools will continue distance-learning until the end of the school year.

Economic measures: The parliament is continuing its work on the fourth anti-crisis package, which is expected to amend various provisions in the labor code, extend tax benefits and state co-financing of wages for companies, and restrict foreign (non-EU/EEA) investment into specific Polish companies and sectors. A separate bill on increasing state support for business restructuring is also making its way through parliament. In the meantime, tourism associations are pushing for the faster reopening of borders (especially with Germany) as the holiday season is approaching, while retailers are calling for the suspension of the Sunday trade ban.

Political context: The Minister of Health Lukasz Szumowski is facing corruption allegations, while public support for President Andrzej Duda (independent, supported by Law and Justice) is gradually declining ahead of the first round of the presidential election, now scheduled for 28 June.

Hungary

Exit strategy: Indoor restaurants and cafes in Budapest reopened last weekend, while schools and kindergartens partially renewed their activities on Monday, 1 June. Various outdoor events are allowed with social distancing requirements in place. The wearing of face masks in designated places (such as shops or public transport) remains mandatory, while morning hours in pharmacies and grocery stores are still reserved for senior citizens. As the number of active Covid-19 cases declines across Europe, the government is gradually reopening its borders.

Economic measures: The protection of jobs remains the key priority, and the government is considering launching a wage subsidy scheme for the affected sectors, primarily in the tourism and hospitality industries. The latest data shows that the employment level fell by 3% in April as compared to the same month in 2019.

Political context: The parliament is starting to debate draft legislation on lifting the state of emergency, which is expected to be approved by mid-June. In the meantime, the government has sent out hundreds of letters to Members of the European Parliament, foreign embassies, and journalists asking for an apology for calling Hungary a dictatorship during the Covid-19 crisis. This story fits well into the ruling Fidesz’s domestic narrative of blaming the “liberal EU elites” for spreading fake news on the situation in Hungary.

TURKEY: Erdogan’s pyrrhic victory?

( 2 mins) Even though the meeting of the Turkish cabinet is still ongoing (a press conference is expected at around 7pm local time), it seems that President Tayyip Erdogan will not follow through on his previous threat

Read More »

ITALY: Draghi’s “Black Friday”?

( 5 mins) All workers will be required to show a Covid-19 health pass from 15 October, one of the world’s toughest anti-Covid regimes that has already sparked riots and which may cause chaos in the days ahead.

Read More »

EUROPE: CEE PULSE

( 5 mins) Bulgaria‘s National Recovery and Resilience Plan is ready for submission to the European Commission. In the Czech Republic, the newly elected Chamber of Deputies is scheduled to hold its first sitting on 8 November. On

Read More »

UK/EU: Brexit tensions return – Next steps

( 3 mins) Following remarks by UK Minister of State Lord Frost in Lisbon today, EU Commissioner Maros Sefcovic will on 13 October unveil proposals to simplify the operation of the Northern Ireland protocol. The EU will offer

Read More »