POLITICAL FALL-OUT OF COVID-19 IN EUROPE

The rapid spread of the COVID-19 presents a severe test for democracies and for the European Union as an institution. And so far, it has been every nation for itself. For the European Union and the new team at its executive arm, the European Commission, led by Ursula von der Leyen, this pandemic is a challenge to her intention to have a “geopolitical commission. This is a major test for the European Union, with the virus piled on top of existing crises over migration and rule of law. European values, solidarity, sticking together sound like hollow phrases, and we haven’t reached a spike in the virus yet. It’s very evident how little cooperation there has been among member states and how slow governments have been in supporting the economy.

Matters will get worse with the economic impact of the crisis. The euro crisis could return, because there are too many bad debts in banks, especially in Italy, and there is still no proper bank resolution regime and no eurozone deposit insurance.

The possibility of the EU’s three largest economies (Germany, France, and Italy) upending the liberal settlement of the world’s biggest economic block, means the political fall-out from COVID-19 could influence events around the world for decades to come. At least in the medium-to-long term, the most likely political fall-out from the pandemic will be an increase in hostility to immigration, social conservatism, and sympathy for protectionist economic policies.

Italy: Italy has already felt the full force of political turmoil in recent years, with its 2018 general election seeing the populist Right win the most seats and the populist Left win the most votes. The European Union has once again disappointed the Italians. This disappointment comes on top of the previous ones: the introduction of the euro  currency, which did not live up to the expectations of a majority of Italians, the financial and economic crisis of 2008 which had such a strong impact on the country, the migrant crisis during which Italy felt abandoned. All this explains the rise of a euroscepticism. Many Italians believe that the European Union is disintegrating before their eyes, with the impossibility of developing a coordinated health policy, with each nation state acting as it sees fit. According to a Monitor Italia poll published on March 13, 88% of Italians believe that the European Union is not helping Italy in their fight against coronavirus. 67% consider that belonging to the EU is a disadvantage compared to 47% in November 2018, the date of the previous survey.

France: France was already facing a populist surge ahead of its 2022 presidential election. Marine Le Pen, leader of the right-wing Rassemblement National has used the COVID-19 as an opportunity to call for an end to the EU’s system of open borders between countries.

Germany: Even in Germany, there appears to be a high risk of post-COVID-19 political disruption. The right-wing Alternative für Deutschland (AfD) has been growing in popularity in recent elections, especially in the poorer east. With an election due in October 2021, the ruling Christian Democratic Union party has already been thrown into disarray at state level by the AfD’s rise, causing the resignation of the party’s leader and presumptive nominee for chancellor. With the AfD polling around 15 percent, the party’s leader in the German parliament has argued that the COVID-19 pandemic was caused by “the dogma of open borders". The impact of a national and global lockdown is likely to be especially severe on an export-driven economy with a strong dependence on global supply lines and pan-European trade.

Sweden: In Sweden, the right-wing Sweden Democrats  already lead  in the polls ahead of the 2022 general election.

Greece: In Greece where an election is due in 2023 populists have enjoyed electoral success on the back of anti-EU sentiment for nearly a decade.

Even in countries where the virus has not yet taken hold as severely as in Italy, the higher pathogen risk and likely economic impact of the pandemic mean that nationalist parties will find a favourable electoral climate in the coming years.

Come election time, the increasing popularity of nationalist parties will force more mainstream parties into awkward and potentially unworkable coalitions, creating an even bigger opportunity for the nationalists in the next round of elections in the mid-to-late 2020s.

The next step could be the end of the EU’s open border Schengen zone, and reduced economic coordination and adherence to budget rules in the eurozone. Following on so soon from Brexit, that could be a huge challenge to the future of the EU.

An even greater challenge would be Italy or France leaving or demanding wholesale reform of the eurozone or single market. While the EU could probably survive a Greek exit, and Germany is unlikely to countenance leaving, the EU would face an existential threat if its second- or third-largest economy was to leave or opt out of various integrationist arrangements.

Taking into account the fragile state of some of Europe’s biggest economies, the political fall-out from the pandemic could be the not-so-strange death of liberal Europe. This would be an impact felt for decades to come.

According to Fitch Solutions

COVID-19 will affect Europe in the medium term, namely by shifting political preferences among the population and by delaying key political events.

Changes in Political preferences

• Shift in government policy
• Reduced speed of labour market reforms
• More generous welfare policies
• Shift in support for political parties
• Different election outcomes
• Potentially broader policy changes

Delays of Political Events

• Postpones reforms and other changes
• CDU Leadership Election Delay
• Possible extension of post-Brexit trade talks

The EU’s uncoordinated public health response will likely feed into eurosceptic sentiment. While the bloc’s stance on monetary pomocy has been more coherent, its fiscal response will likely be much more uneven due to significant differences between public finances of EU member states. This carries the risk of deepening income inequality and driving support for eurosceptic parties, notably in Italy.  This trend will make it more difficult to reach a compromise on various EU reforms with divisions between Northern and Southern states. This includes the EU Banking Union or planned reforms of the European Stability Mechanism, the latter of which will be complicated further as it could play an active role in mitigating the economic fallout from the Covid-19 outbreak.

Political support for more generous welfare policies or tighter regulation of the labour market could also increase. The fiscal response – while mitigating the impact on the overall economy – could exacerbate economic inequality in individual countries, particularly where zero-hour contracts feature prominently in the economy. While this is unlikely to translate into significant support for dramatic reforms such as a universal basic income, left-wing parties advocating more generous welfare policies or tighter regulation of the labour market will rise in popularity, particularly in the event of a prolonged recession.

COVID-19 will delay a number of elections and negotiations in Europe. Several key political events have already been postponed in Europe. This includes the leadership election in the German ruling party, the Christian Democratic Union (CDU), as well as the UK’s municipal elections (including for the mayor of London), and a constitutional referendum in Italy on reducing the number of lawmakers in the national parliament. While these delays are unlikely to sway the outcome of these events, they will hold up key decisions with potentially negative effects. For example, in the case of Germany, the CDU election delay will prolong a period of a power vacuum in German politics, ultimately delaying a more pro-active German policy within the EU on initiatives such as the Banking Union.

Other political processes will also be directly affected, notably the UK’s post-Brexit trade negotiations with the EU. The second round of these talks – scheduled  will now take place through a video conference, which will complicate the process of overcoming the very serious divergences in the UK’s and EU’s proposed drafts for a trade deal. As restrictive public health measures are set to remain in place until at least April, further such remote negotiations are likely. This will raise the likelihood that the UK and EU will eventually agree to extend the transition period by June 2020 beyond its current expiry on December 31, 2020.