Europe’s post-Covid divide
Governments in Europe have used the Covid-19 crisis to increase their powers and debts, and are now warning of new emergencies to further broaden their role. However, several countries have pushed back at this approach, noting the waste and corruption it brings.
In a nutshell
- State interventionism has become the norm in many nations
- Some countries have opted to favor personal responsibility
- These two blocs will have radically different economic outcomes
Though policymakers in European Union member countries have differed in their approaches to tackling Covid-19, several common patterns have emerged. These will likely drive policy action in the coming years, especially if the virus persists or new large-scale health threats appear.
Covid as such has not changed our future, but it has emphasized the weaknesses of international agencies and state-run health systems. Many policymakers panicked and set a bad precedent. In some cases, their garbled responses will warp policymaking and hinder prospects for economic growth.
Restricted movement
Covid-19 was circulating as early as November 2019. However, most countries outside China did not report any cases until about February 2020, and then they did not take any action to stop the spread of the virus until March. When the severity of the crisis became clear, governments prioritized avoiding the collapse of state-run health systems, regardless of the economic disruptions involved.
This explains the widespread enforcement of various lockdowns, which remained in place until safe, effective vaccines were available. Now, policymakers periodically suggest that new lockdowns could be around the corner if the current vaccines lose their effectiveness against new variants or turn out to be powerless against new viruses.
Moreover, there was a general tacit agreement to pursue national policies, rather than adopt a common approach. Not surprisingly, these strategies led to severe restrictions on people’s cross-border movements. The EU did little to prevent this situation. The response to Covid-19 has made a mockery of Article 168 of the Treaty on the Functioning of the European Union, which calls on the bloc to “encourage cooperation” between the member states on health matters. Nevertheless, the recent EU4Health program established by regulation 2021/522 must still demonstrate that its budget of 5.3 billion euros is justified.
Governments continue to tell citizens that they should brace for future emergencies.
That said, the latest Covid figures are encouraging, and people rightly believe that the worst is over. In northern European countries, Covid-19 is no longer a top-tier issue. This will soon become the case in other countries as well.
However, governments in several EU member states see things differently. In Germany, France and Italy, people are required to show proof of vaccination – the so-called green pass – and wear a mask to access certain facilities and interact with other people nearby.
Through the media and frequent legislation, governments like these continue to send the clear message that citizens should stay alert and brace for future emergencies. They should not count on returning to the pre-Covid paradigm anytime soon.
These approaches suggest that different countries have drawn different lessons from the Covid experience, and hint at deeper divides that might result in distinct economic scenarios, with consequences for the architecture of the EU in general.
State intervention
Covid-19 proved an ideal opportunity for interventionist politicians. Over the past decade, most policymakers have sought new missions that would justify their role and allow them to tamper with the economy.
The first was the fight against inequality, which did not gain enough consensus mainly because the public sensed that enormous income transfer programs would create intolerable abuses and hit the middle class. The 2008 financial crisis provided a much better excuse to manipulate financial markets, ease public debt servicing and hand out subsidies to the many banks that had engaged in risky ventures and put the regulatory authorities in a rather embarrassing position.
More recently, the fight against climate change has justified a new wave of governmental intervention: regulation in the name of sustainability, subsidies to green industries, new taxes to finance those subsidies and grand public investment programs.
Disappointing growth and rising inflation have revealed the faults in that strategy. Slow growth made it hard to increase tax revenues and cut public expenditure, while imbalances in financial markets raised numerous questions about the wisdom of keeping nominal interest rates close to zero.
Within this framework, the Covid crisis has offered new hope to the advocates of state intervention. It has legitimized a wider economic role for the government and encouraged authorities to allow extended financing, regardless of the consequences.
Legitimacy came from the idea that collective problems need collective solutions dictated by state authorities, and that the biggest emergencies require giving governments exceptional powers. This explains why most leaders deliberately painted the threat of Covid in catastrophic terms while essentially prohibiting free-market solutions. The current green pass requirements follow the same logic.
Brussels jumped at the opportunity to increase its power.
The financing came from three sources. First, the EU eschewed fiscal discipline, allowing governments to run large budget deficits and increase their debts. Second, the European Central Bank committed to financing new debt. Third, Brussels jumped at the opportunity to increase its power, allowing member countries to take on even more debt and finance the post-Covid “recovery” with what has turned out to be a gigantic program of subsidies to interest groups, doled out behind the veil of sustainability, digital transformation and gender equality.
More government means larger expenses and is viable only if the actors obtain both legitimacy and funding. This double condition is unlikely to materialize, although for different reasons: lack of legitimacy in places like Scandinavia, and lack of funds in places like Italy or France.
Opposing the narrative
The advocates of more state intervention need people to believe that another emergency is looming, that they cannot adapt quickly enough and that governments know better. Scandinavia has shown that this narrative does not go unopposed, and that the authorities are unwilling to risk their credibility and prestige by treating members of the community like puppets. Citizens’ sense of personal responsibility limits the range of government action and the depth of its abuse.
A new Covid-like crisis could precipitate a major political crisis.
In countries where people do not see government intervention as the only solution to a widespread problem, the next emergency will trigger neither a major recession nor a public-finance explosion. These countries will be the economic winners, both in the short run (with continuing growth) and in the long run (serving as a catalyst for investments and productive entrepreneurs).
Scenarios
In countries where the notion of personal responsibility is weaker, the prevailing narrative is that new emergencies await beyond the horizon. These countries are unlikely to change their inclinations soon and are therefore headed for trouble. Finding scapegoats for poor economic performance and inventing bugbears to justify spending and regulation will require more debt-financed public spending and gullible voters.
Confrontation between these two approaches seems likely. With inflation rising fast, some member states have asked EU and eurozone authorities to end Covid exceptions and enforce monetary and budgetary rules. It is possible that the tension will come to a head by mid-2022, after the French and Italian presidential elections (the latter potentially leading to general elections).
Until then, the elephant in the room will go unmentioned. But if a new Covid-like crisis does occur, and some governments remain persuaded that emergencies offer opportunities to expand their role, the situation could easily precipitate a major political crisis on a continental scale. Then, inflation will ensure that using monetary policy to kick the can down the road will no longer be an option.
