EUROPE/MACRO: Balancing the vaccines-lockdown-economics triangle

While planning and logistical challenges might explain the variation in vaccination rates across Europe, it is too early to draw conclusions about these differences. A majority of the population still supports lockdowns, but compliance with restrictions and certain groups' opposition are rising challenges. Despite the ever-increasing cost of extending furlough schemes, the policy debate is unlikely to move in favor of fiscal consolidation during the first half of the year. The challenges of vaccination At this point, there is a significant disparity in the speed with which countries are administering the vaccine, with countries such as France and the Netherlands significantly lagging behind their EU counterparts. In some decentralized states such as Spain or Germany, there is also a lot of variation between vaccination rates across regions. While it might be tempting to reach conclusions about the causes of these differences, it is too early to make a final judgment on the matter. Still, a lack of planning and distributional and logistical challenges might be playing a role in the differential speed of vaccinations. For instance, both the Pfizer/BioNTech and the Moderna vaccines require two shots. Some countries have decided not to administer all the doses available right away amid ongoing concerns about vaccine supplies. In addition, the slow rollout might be explained by the fact that most countries have started vaccinating older people, which might simply require longer average time slots per appointment than younger cohorts. Regarding supply problems, some EU countries have also criticized the European Commission for initially turning down the purchase of extra doses of the Pfizer/BioNTech vaccine. Supply issues are unlikely to remain a problem in the long term, given the EU's deals with multiple manufacturers. But bottlenecks represent a short-term threat unless already-approved vaccine producers ramp up their production. The Commission has already announced this week the purchase of up to 300mn additional doses of the BioNTech-Pfizer vaccine, and a new vaccine production site will open in Germany. The distribution of Moderna's vaccine has already started, and approval of the University of Oxford/AstraZeneca vaccine is expected by the end of January. Restrictions still the default answer Governments are also facing a difficult balancing act between promoting confidence in the vaccine effort and encouraging people to stay at home in the meantime. In most European countries, people seem to be willing to accept new restrictions, especially where the situation is critical, as the UK and Germany. Travel restrictions are so far being introduced between regions. But due to the lack of binding coordination on the EU level, international travel bans remain a risk to watch. Despite overall support for restrictions, however, compliance has been a challenge, and certain segments of the population remain staunchly opposed to the lockdowns. In Italy, for instance, the #Ioapro (“I open”) initiative was launched on social media, inviting restaurateurs to stay open for lunch and dinner starting from 15 January. This violation of the government's anti-Covid provisions is becoming increasingly popular. The structure of political competition might shed light on some governments' reluctance to enforce compliance more forcefully, such as in the UK. In majoritarian systems, "median" voter concerns about the restrictions' downsides may be harder to disregard than in proportional systems. That could explain why neither the UK government nor the opposition seems willing to discuss compliance and enforcement issues. The country's strong vaccination start further complicates such a debate. Never-ending pressures for crisis support Meanwhile, the persistence of lockdowns puts additional pressure on European governments to extend crisis support measures, delaying the adjustment of their economies. The fear of rising unemployment is forcing several countries to consider prolonging furlough schemes further, albeit with varying scopes. For instance, Spain is weighing an extension until the end of May – its current scheme expires on 31 January – while the French government might delay to 1 March a planned reduction in the percentage of furlough wages covered by the state. These postponements could imply an extension of "layoff bans" (de facto higher penalties for sacking workers) currently in place in some countries. Governments might also adopt additional support measures – Italy, for example, is working on a new package worth around 1.5% of GDP to support the vaccination drive and pandemic-battered businesses. Despite these initiatives' ever-increasing costs, the debate on when to move towards cutting budget deficits is, at best, in its very early stages. With elections looming in the fiscally-conservative Netherlands and Germany and Covid-19 cases rising across Europe, it is unlikely that the policy mood will significantly change in favor of consolidation in the first half of the year. This lack of movement should not be mistaken for the "change of paradigm" mooted by some scholars and think-tankers by which debt levels might start becoming less relevant. The new waves of the virus might be delaying the conversation on consolidation, but it is too soon to say whether Covid-19 will lead to a fundamental rethink of fiscal policy by EU policymakers. At the same time, some governments might try to push for the introduction of fiscal measures in an effort to limit the impact of any future consolidation effort. For instance, the Spanish ruling coalition is allegedly preparing additional tax hikes to lock in revenue that will come in handy once budget deficits need to be brought down. Such a course of action looks less likely in France, given the presidential contest taking place in the spring of 2022.

January 14, 2021

Macro

EUROPE/MACRO: Balancing the vaccines-lockdown-economics triangle

BY Luis Cornago, Antonio Barroso, Carsten Nickel

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January 14, 2021

Macro

EUROPE/MACRO: Balancing the vaccines-lockdown-economics triangle

BY Luis Cornago, Antonio Barroso, Carsten Nickel

Report Contents

Registration

More by Luis Cornago, Antonio Barroso, Carsten Nickel

EUROPE: Managing the pandemic – what we are watching

GERMANY: The greening of federal politics continues

UK: The union’s future in spotlight

EU: The state of the debate on further stimulus

EUROPE: Managing the pandemic – what we are watching

GERMANY: CDU/CSU (finally) opt for Laschet – Implications

EUROPE: Managing the pandemic – what we are watching

FRANCE: Race to break Macron-Le Pen duopoly unlikely to be solved before Q4

UK: Playing for time on Scottish independence