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September 23, 2020


EUROPE: Alongside the virus, institutional capacity issues resurface

BY Antonio Barroso, Carsten Nickel, Luis Cornago, Wolfango Piccoli

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EUROPE: Alongside the virus, institutional capacity issues resurface 1

Medical capacities

The first and most immediate variant is the question of medical capacity. In a special briefing one day prior to the government’s statement, the UK’s chief scientific and medical officers had warned that 50,000 daily cases were possible within the coming weeks if the current increase in new infections could not be slowed down. This, in turn, has led to renewed concerns about hospitals experiencing capacity issues. This question has returned to the forefront across Europe, from first fears of regional hospital bed shortages in Austria to calls for better coordination among the relevant regional authorities in Germany’s decentralized system.

In fact, local capacities for pandemic management – not the just the daily number of new cases – are emerging as the crucial signpost for stricter lockdown measures everywhere in Europe this autumn. This is why structural weaknesses with testing matter, whether in the UK’s chronically underfunded public health system, or in France, where free tests have been offered to large swaths of the population, creating long waiting times for results. If respective issues cannot be addressed quickly, blanket restrictions are the only way forward for political decision-makers amid rising case numbers, as seen in the UK this week. (France, meanwhile, is aiming at limiting access to free tests.) Therefore, national institutional capacities for handling the virus locally will determine whether local or perhaps sectoral lockdowns are at all viable in a given country, allowing economic activity to continue to a greater degree than elsewhere.

Fiscal capacities

New nationwide lockdowns are – at least, for now – not on the cards because of their economic (and thus, political) effects. This points to the second variant of the institutional capacity problem: the ability to support national economies. After initial support packages to “put economies to rest” during the lockdown phase in spring, governments have drafted at times substantial stimulus packages to reignite their economies over the summer. But now a blurrier picture is emerging. Hibernation and stimulus measures might be required at the same time, at a moment when the fiscal implications of what has been done so far have already led to calls for greater caution, as, for instance, in the UK.

This, however, is not just a question of fiscal space. It is also, first, a question of the institutional capacity to dynamically target measures at those sectors and groups who require support in an ever-evolving pandemic setting. In the UK, second, it is also an issue of ongoing party-political realignment. The Conservatives have won many constituencies previously held by Labour, which might make an extension of the furlough scheme beyond end-October more palatable. For now, however, only business loan schemes are expected to be extended. The focus would thus shift away from workers and back onto the survival of companies as employers – arguably a more traditional approach for a UK Conservative government whose orientation, however, remains in flux. But if 40% of borrowers from the GBP 35bn “bounce back” loan scheme are expected to default, this will again pose questions, not just regarding the direct fiscal fallout, but also concerning the cost of resulting job losses. Behind this, tough choices loom regarding the government’s willingness to let certain sectors or workers go under.

Administrative capacities

In the EU, meanwhile, the worst-hit countries are receiving assistance given their limited fiscal space. However, much of the public debate around the EU recovery fund was focused on its overall size and the willingness or reluctance of Northern countries to support. But this misses the third important institutional point. Even if national recovery plans will have to be greenlighted by Brussels first, this will hardly replace able and efficient local administrations and real political determination on the national level to channel the money into the most promising areas and sectors. This problem will become even more challenging with the evolving pandemic situation. The latter might tempt some countries such as Italy even further to try and use part of the funds for short-term support measures rather than the promised, structurally green and digital upgrading of Europe’s economies. When the money starts flowing in early 2021, it might (once again) not be the time to spend strategically in many places.

In sum, many countries who might struggle most with managing the pandemic from a public health perspective might also have the greatest difficulties with using what they receive in support in a truly effective way. The factors connecting both issues are institutional capacity and governance quality. The stringency of EU oversight for national reform plans is, therefore, one factor to watch during the currently still ongoing, final rescue fund talks between the European Parliament, the Commission and the German Council presidency. But the biggest signpost might be the already agreed “emergency brake” allowing any member state to put the distribution of funds on hold in case of major concerns. The Dutch parliamentary polls in March 2021, as well as six regional state and the Bundestag elections in Germany next year, might all have the potential to re-increase Northern public scrutiny for the way in which recovery funds are spent – at a moment when elsewhere, lofty EU ambitions for structurally sustainable investments might become ever harder to live up to.

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