Europe facing a perfect political and economic storm

Europe facing a perfect political and economic storm

Europe facing a perfect political and economic storm
On Tuesday, Emmanuel Macron asserted that France is ‘at war’ with the virus. (AFP)
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The EU closed its external borders on Tuesday, as France and Germany also announced separate measures to “lock down” the EU’s two largest economies. While the moves are time-limited for weeks initially, the continent could yet be facing extended economic and political turbulence, given its pre-existing fragility.

First and foremost in the minds of EU Commission President Ursula Von der Leyen, French President Emmanuel Macron and German Chancellor Angela Merkel is the public health crisis and saving lives. The public health situation has deteriorated in both of the EU’s largest economies in recent days and, while not as grave as in Italy or Spain, there is real and mounting policymaker concern.

Take the example of France, where, as of Tuesday, there were more than 7,700 reported cases of coronavirus and a death toll of 175 (a rise of 48 in the 24 hours from Monday). Germany had more than 9,000 confirmed cases and 26 deaths. While not nearly as high as in Italy or Spain, Macron (and indeed Merkel too) is rightly concerned by the rate at which the number of infections and death toll is rising. This comes amid significant flouting of the rules already in place by some French citizens, including a ban on crowds of more than 100 and the closure of non-essential shops.

Most badly hit has been the Alsace region near Germany and greater Paris. On Tuesday, Macron asserted that France is “at war” with the virus and announced that the second round of local elections due to be held on March 22 would be postponed. Meanwhile, the police and army will strictly enforce the new restrictions, with so-far-unspecified “punishments” for those who break them. Hotels and other private businesses will, meanwhile, be requisitioned by the state in order to help treat sufferers of the virus.

With the World Health Organization saying last week that Europe had become the center of the coronavirus crisis, the political drama of the start of this week alone underlines what extraordinary times the continent is living through. In Spain (which started controls at its land borders at midnight on Monday), there have been more than 500 deaths, while Italy is at about 2,500 deaths.

The political drama of the start of this week alone underlines what extraordinary times the continent is living through

Andrew Hammond

While the human cost must always be uppermost, the economic challenges are also huge and growing. This is why, after a videoconference call of about four-and-a-half hours, the EU’s 27 finance ministers issued a statement on Tuesday promising “a strong determination to do whatever it takes to restore confidence and support a rapid recovery” to tackle the crisis. These words were likely deliberately chosen to echo former European Central Bank (ECB) chief Mario Draghi’s 2012 pledge to preserve the single currency, come what may, which proved a turning point in the euro zone crisis.

Yet, symbolic as Tuesday’s language was, the absence (so far at least) of an EU-wide stimulus plan is likely to disappoint markets, which believe many of continental Europe’s policymakers are significantly behind the curve. The problem, as ECB President Christine Lagarde knows only too well, is that the current crisis comes on top of the pre-existing weakness of the euro zone.

Some key economies, including Italy — the post-Brexit bloc’s third largest — are almost certainly now in recession. This would be Rome’s fourth in only about a decade, but it could also be true of the entire euro zone, which grew by just 0.1 percent in the fourth quarter of last year. This has led to growing speculation that the integrity of the euro zone is, once again, under threat.

To be sure, the risks are not the same as in the last crisis, which came the best part of a decade ago. The euro zone is unlikely to collapse because of failing banks, as was possible back then. But it may now be at significantly greater risk of failing politically amid a picture of even greater government volatility and uncertainty than in 2012.

There is not just a minority government in Spain and weak governance in Italy. This political instability is also reflected in France, where Macron has been weakened by a year of “yellow vest” protests, and Germany, where Merkel’s long period in power is approaching its end.

This is before one even considers the rise of right-wing populism in Eastern Europe. Indeed, while challenges to Brussels are often seen through the prism of Western European states — especially with Brexit — Poland and Hungary are also proving big thorns in the side of the EU, including through their leadership of the Visegrad Group of ex-Warsaw Pact states in what has been termed a potential east-west rift.

Taken overall, continental Europe could now be in the midst of a perfect political and economic storm. While the coronavirus is the immediate trigger, this pandemic’s shock comes on top of pre-existing instability and fragility across the continent, including in leading economies like Italy, Spain, France and Germany, which could tip the entire single currency area into a deep, sustained downturn.

Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics.

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