
European policymakers see opportunities amidst the economic damage
Graham Hook. Head of UK Government Relations & Public Policy and Elizabeth Gilliam. Head of EU Government Relations & Public Policy.
The rapid, global transmission of a new killer virus requiring the shutdown of whole sectors of the economy was a situation for which no European government was adequately prepared. But as infection rates begin to decline, and millions of businesses prepare to exit a state of suspended animation, policymakers are keen not to ‘waste a good crisis’ to pursue their broader policy objectives.
The end of the beginning
The rapid, global transmission of a new killer virus requiring the shutdown of whole sectors of the economy was a situation for which no European government was adequately prepared. But as infection rates begin to decline, and millions of businesses prepare to exit a state of suspended animation, policymakers are keen not to ‘waste a good crisis’ to pursue their broader policy objectives.
Funding the recovery – greater post-crisis convergence?
Crises have provided the political impetus to drive greater convergence in the Eurozone in recent decades. And the Corona crisis is likely no exception. Karl Marx wrote that history repeats itself: the first time as tragedy, the second as farce. And the tragedy today is that the EU countries most affected by the coronavirus are also the countries left scarred by the global financial crisis and the ensuing Eurozone debt crisis. Old resentments from the last crisis that have to date remained unresolved are now polluting the discussions about how to finance the recovery, putting Europe’s unity in jeopardy.
To prevent history repeating itself, the southern countries argue that the recovery cannot simply be fuelled by more debt, which risks triggering another Eurozone debt crisis. Instead, they argue for greater use of fiscal transfers between Member States or debt mutualisation. However, the northern countries fear becoming entangled in a permanent fiscal union with their “profligate” southern cousins and are being dragged kicking and screaming towards the creation of a new Recovery Fund, due to be unveiled on 27 May.
In the UK too, greater fiscal transfers are on the menu as Boris Johnson pursues his project to ‘level-up’ the economic output of the regions and nations outside London and the South East. With higher borrowing already due to bear the cost of part of that programme, and No.10 reluctant to contemplate tax hikes until the recovery is well underway, the crisis stimulus measures will add significantly to the UK’s growing debt pile; but so far, there’s little dissent in any political quarter.
A greener, more resilient recovery?
Across Europe, those immediate stimulus measures came with few strings attached – unsurprising, given the need to act rapidly to save jobs. And even where limited conditions were applied, such as on climate for some of the airline bailouts, they are being challenged as too weak.
But the creation of an EU Recovery Fund worth trillions of euros now provides an opportunity for policymakers to stack the deck in favour of green projects. While the precise details will be linked to the final Fund design, there is a clear will to tie any financing to the EU’s Green Deal project, launched to great fanfare last December. Areas of focus for financing that have already been identified include renewable energy, clean transport and green agriculture.
By contrast, calls to ‘green the recovery’ have yet to make a major impact on the UK debate. Despite being the first country to legislate for net zero emissions by 2050, the UK has yet to set out a comprehensive strategy to reach that goal. With the COP 26 Summit now postponed from November, there is a huge opportunity to integrate climate objectives into the recovery strategy, to build a more sustainable economy – but, so far, no sign that it is being seized.
Less open, more protectionist economies?
Where UK and EU policymakers do converge in their post-crisis priorities is in their approach to protecting ‘strategically-important’ capabilities; and to China.
In Europe, the Commission has urged Member States to make full use of existing FDI screening tools to protect critical health infrastructure and health Research & Development linked to a potential vaccine. However, we’ve already seen some Member States behave opportunistically to broaden the definition of critical infrastructure to include food, digital infrastructure, media and data services within their frameworks. This trend is likely to gain traction as the European Commission develops its roadmap to recovery, where it has signalled that there will be a strong focus on “strategic autonomy” as well as being more assertive in combatting unfair trade practices deriving from foreign state subsidies, which is primarily directed at China but also to a certain extent the US in the technology sphere.
In the UK, even before the crisis, the Johnson administration had also signalled a more interventionist stance on foreign takeovers, planning new legislation to bolster its ability to intervene on national security grounds. With the legislation yet to be published, officials are now looking at the case for defining national security more widely. But even without the new powers, the Government flexed its muscles in the middle of the current crisis, preventing control of British graphics chip manufacturer – Imagination Technologies – passing to a Chinese-owned company.
When it comes to China, government intervention is only likely to grow as increasingly hawkish Tory MPs seek to steer towards a more assertive UK stance. Having failed in March to win a vote to stop the use of Huawei technology in the UK’s telecoms infrastructure beyond 2022, Tory backbenchers will mount a stronger second challenge in the Summer when the issue is debated again as part of the Telecoms Security Bill.
No return to business as usual?
But as policymakers return to their pre-crisis political agendas, that does not mean a return to business as usual. With further huge spending programmes on the cards, they will not waste the second opportunity afforded by the corona crisis. EU convergence, the Commission’s Green Deal, Johnsonian ‘levelling-up’ and more protectionist trade stances in the name of strategic autonomy will all be accelerated through those programmes in the months and years ahead. So that when history next repeats itself, and the next crisis hits, the political and economic backdrop will likely look significantly different.
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