Europe’s Coronavirus Test

The novel coronavirus of 2019, or COVID-19, is sweeping through the European continent. After an initially lukewarm response, European leaders have taken increasingly decisive steps in the face of this massive challenge. Italy is in a countrywide lockdown, with over 30,000 declared cases. Spain, Germany, and France each have over 10,000 people who have tested positive. Thousands more cases have been identified throughout the rest of Europe. And all governments are bluntly telling their citizens the naked truth: this is only the visible tip of the iceberg, and things will get much worse over the next few weeks.

They are correct in their assessment. To Europeans, the COVID-19 pandemic is first and foremost a public health crisis, as it is for the rest of the world. But it also bears a distinctive political and economic challenge to the European Union.

On the one hand, the European project is deeply rooted in principles and policies, such as solidarity and the freedom of movement for persons and goods, that find themselves at odds with the measures national European governments are now forced to implement—confining their population at home, closing borders, and focusing limited national resources on their own infrastructure. On the other hand, the European Union itself has very little competence, according to the EU Treaties, when it comes to health policy, and this matter remains largely in the hands of individual member states. Yet there is a broad expectation, in Europe and abroad, that the European Union will take charge of the matter and direct the response to the COVID-19 crisis. Citizens worried about their physical and economic safety do not care about treaty limitations.

Unfortunately for EU leaders, they cannot lawyer their way out of this crisis by relying on the treaties and must use all tools at their disposal to tackle it for three main reasons. First, an effective response to this public health catastrophe requires a coordinated and cooperative approach by all European national governments. Second, should Europe fail in this task, it will inevitably be perceived as failing its citizens and suffer a severe loss of political credibility, which it did not have in excess to begin with. Third, the economic and financial crisis likely to result from the COVID-19 pandemic can only be managed if the European Union, with all its institutions and instruments, steps up and takes decisive action. So far, the response has been staggered, with national governments stepping in as first responders and the European Union now beginning to jump into the fray. Barring a significant change of direction, the transatlantic community will also face serious strain in this crisis.

National Governments Were Europe’s First Responders

The first European reactions to Italy’s suffering were largely perceived both by Italians and European watchers as underwhelming. Notably, Rome repeatedly asked to activate the European Union Mechanism of Civil Protection for the supply of medical equipment for individual protection. Through the mechanism, member states can provide assistance to one another that is coordinated by the Emergency Response Coordination Centre, with the European Commission covering at least 75 percent of the transport and operational costs of the deployments. But no member state answered the call. Of course, there are some valid reasons for that, as all European countries will soon be confronted with comparable situations at home and will experience shortfalls of the very same equipment that Italy desperately needs (e.g., masks and ventilators). Yet, the political message this distressed silence sent was alarming.

These past two weeks, many national leaders have shifted gears and taken a series of strong measures. French president Emmanuel Macron announced massive measures to support the economy and the labor market, such as the creation and extension of an exceptional partial unemployment scheme and the deferment of all bills, rents, and taxes to alleviate pressure on companies struggling from the economic downturn—backed by €350 billion ($379 billion) of loan guarantees. Spain also announced an €18.2 billion ($19.7 billion) package to support its economy, as Italy previously had with a €7.5 billion ($8.3 billion) package. Most significantly, Germany’s economy and finance ministers have said that they were willing to use the “bazooka,” that is, provide unlimited financing to businesses through the development bank KfW (€550 billion, equivalent to $596 billion, will be made available to companies through government loans) and could even consider nationalizing companies in critical condition. In a remarkable reversal of the UK’s austerity policy, the new finance minister, Rishi Sunak, announced some very significant tax and spending decisions, followed five days later by £330 billion ($388 billion) to banks to back up loans to businesses. Unlike some other European countries, however, the United Kingdom is not yet introducing novel economic measures, such as stand-alone income payments or “rent holidays.”

These urgent decisions were much needed, although they were not sufficiently coordinated—partly justified by the swiftness of the contamination and a limited understanding of the virus. This was only the first-response stage of a months-long crisis, with potentially enormous political and economic consequences. In order to successfully manage it, European countries will need to act together and take bold and joint action at the EU level.

An EU-wide Strategy Is Now Critical

Following these national measures amid a growing crisis, the European Commission announced the swift release of €7.5 billion of investment liquidity (approximately $8.3 billion) to support health care systems and businesses (in particular small companies), which will also serve to kickstart an ad hoc €37 billion fund (about $39.8 billion) over the next few weeks. European finance ministers also announced new measures to bring flexibility to the Eurozone’s fiscal rules on March 16, effectively activating a clause of the Stability and Growth Pact (which limits fiscal deficit to 3 percent of national GDP) that will provide member states with more room to maneuver in supporting their economies. This is especially crucial for countries like Italy, where public debt already stood at around 135 percent of GDP before the crisis.

The most forceful—and most awaited—measures finally came from the European Central Bank (ECB) late on March 18, after days of criticism for not acting faster or more decisively. ECB president Christine Lagarde announced a €750 billion (around $812 billion) temporary asset purchase program, aptly named the Pandemic Emergency Purchase Program. It will purchase both public and private securities in a flexible way and run until at least the end of 2020, giving more breathing room to European economies. In addition, the Bank is waiving eligibility requirements on securities issued by the Greek government and leaving open the option to lift some self-imposed limits on ECB action. These measures reflect a clear intent to stem the crisis, as noted in Lagarde’s message upon announcing the PEPP: “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro.”

These measures will be welcome across European capitals as a sign the European Union is ready to match the actions taken by national governments (at least on the financial side). But there are still areas where only a joint, coordinated EU response can rise to the challenge. While national governments, the European Commission, and now the ECB have expressed their determination to do whatever it takes to keep the economy afloat, calls for EU-wide government bonds were immediately shut down by pro-austerity European governments in a scene reminiscent of the 2008 financial crisis. In an otherwise remarkably strong address, German chancellor Angela Merkel did not make any reference to the European Union. Meanwhile stocks continue to fall, and automakers are starting to temporarily shut down factories at a time when Europe was already struggling with low growth and stubborn unemployment rates.

In addition, although closing borders might be an appropriate public health response to help governments keep their domestic situation under control, it can also contribute to a fragmentation of the European Union’s response—and to the rise of selfish nationalist reflexes. The Commission has had to step in to prevent national bans on exporting medical supplies to other member states. And Italians may understandably feel their fellow Europeans are failing them. They will be watching closely for any strict conditions that could be placed on a bailout, which would signal European solidarity only goes so far. Likewise, populist and anti-EU movements will be eager to exploit such an opportunity to push their platforms.

It is now up to national leaders rather than “Brussels” to decide if they will focus on their own backyard in a way that could jeopardize future solidarity and unity, or prioritize a joint European response. Next week’s Council summit (conducted via video) will show whether they are ready to make some of these important decisions and move on to other critical, non-COVID-19 issues, such as accession for Western Balkan countries, to show that the world does not stop even when people are stuck in their homes. This would be a welcome, forward-looking message from EU leaders, and there are other measures they could contemplate in the short, medium, and long term:

- Establish a mechanism for systematic coordination of national measures at the European level, perhaps building on the Emergency Response Coordination Center with constant Council and Commission contact;

- Pool the purchase of personal protective equipment for health care workers;

- Develop a common framework to share lessons learned and best practices in the management of a pandemic, both in terms of prevention and management;

- Delineate clear parameters for the suspension of Schengen Area rules in times of pandemic (from people to goods) to ensure a harmonized response in border closures;

- Develop a strategy to relocate critical elements of the supply chain of medical and pharmaceutical goods in Europe;

- Build on existing plans to shield European strategic assets and companies from problematic foreign acquisitions, extending this to medical and pharmaceutical industries; and

- Initiate new thinking on fiscal solidarity within the Eurozone, including the possibility of Eurozone bonds, should the economic picture get more dire.

Beyond the European Union: A Transatlantic and Global Cooperative Approach

This willingness to develop a cooperative and international response to the crisis will also matter at the transatlantic level, where signs of retrenchment are showing. The United States implemented a travel ban from all countries in the Schengen Area, a move that has been widely perceived as driven by political rather than public health considerations, given that the number of cases identified in the United States was then already significantly higher than in most European countries and that the ban initially left out some non-Schengen countries that were just as impacted by the pandemic as Schengen Area countries. This move pushed European markets even further down and dealt a severe blow to the notion of transatlantic solidarity, which was already under strain. Reports of efforts to secure exclusive U.S. property rights on a future vaccine that could be developed by European pharmaceutical companies are equally worrying.

Importantly, a fragmented response within the Euro-Atlantic community has broader geopolitical ramifications: as Washington has closed the door amid a crisis of its own, Beijing has come to Rome’s help to provide masks and other supplies—and will now be developing such cooperation throughout Europe and Africa. Of course, pragmatism is needed in a time of crisis. But instead of the now-usual charge of Chinese influence, this moment should instead trigger a realization that U.S. engagement is essential to shepherd a global response to a global crisis. Other actors, including China, could be tempted to depict the current situation as an additional area of transatlantic division and further evidence that the United States wishes to isolate itself from the world, while others are ready to step in.

The European Union, now the epicenter of the pandemic but also a key player and supporter of multilateralism, is uniquely positioned to support a global and cooperative response to COVID-19. To do so, however, it will first need to convincingly address the unique political and economic challenges this pandemic carries for itself and its member states.

Quentin Lopinot is a visiting fellow with the Europe Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Donatienne Ruy is an associate fellow with the CSIS Europe Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2020 by the Center for Strategic and International Studies. All rights reserved.

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Donatienne Ruy
Director, Executive Education and Abshire-Inamori Leadership Academy

Quentin Lopinot