Europe under siege

Fabian Zuleeg and Janis A. Emmanouilidis

EPC Commentary

Brussels 03/2020

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The European Union (EU) and its member states have been hit hard by COVID-19 – but the worst is yet to come. Tragically, more people will lose their lives. Now, the highest priority for Europe's healthcare systems must be to do what they can to minimise the number of casualties from this global pandemic, which also implies helping each other across borders. In this time of need, active solidarity must be more than an empty slogan. EU institutions and member states need to clearly show their readiness to do 'whatever it takes' to deal with the multiple consequences of this unprecedented crisis.

Risk management

For the time being, the responses vary between countries. Some member states are already in a (near) complete lockdown, with dramatic but also at times heart-warming pictures emerging. Other countries are reacting less drastically; in some cases, there is almost a sense of normality, albeit with (increasing) limitations. But given the nature of the COVID-19 crisis, one can assume that the worse is yet to come. Policymakers must recognise that the nature and scale of this crisis demand decisive and immediate responses. At times, drastic actions will have to go well beyond the comfort zone of business as usual – which is no longer feasible or sufficient.

Public policy must proactively manage risk, even if the consequences of said policy are not always clear from the outset. Difficult decisions will have to be taken to avoid the worst. In other words; inaction is more dangerous than lacking the courage to take actions. Public authorities should not only focus on reducing the probability of negative outcomes, but also take the scale of that potential outcome into account. In line with the precautionary principle, policy actions must aim to address worst-case scenarios in an effort to stop them from fully materialising. In the current situation, overreaction might well be the best possible route to take.

In addition to saving the lives of those already afflicted by the virus, the priority now must be to slow down its spread. To achieve this aim, it is likely that measures will have to be amplified in a wide range of countries. Within the EU, public authorities at all levels must coordinate the advice they are giving to their citizens, within and beyond national borders. Given the global nature of the virus, people are confused by the varying responses in different countries, which ultimately undermines the effectiveness of measures, and thus the ability to 'flatten the curve'.

The period of severe disruption is likely to be lengthier than initially hoped for. Consequently, we will witness long-term impacts that will severely affect our economies and societies. Nobody will be able to escape the fallout. That is why decisive and proactive measures to help those who are most affected by this unprecedented asymmetric external shock, which is affecting everybody, albeit to a different degrees, is a sine qua non. COVID-19 does not stop at national frontiers.

Thinking beyond today

It is no longer a question that there will be a global economic downturn. However, decisive action from political leaders can still reduce the negative impact – but only if there is a coordinated and concerted response, encompassing countries across Europe.

Fortunately, we have an instrument to deal with cross-border challenges – the European Union. This is precisely the kind of situation wherein the EU, by coordinating action across borders, directing resources to the most vulnerable and by providing information and support, can be much more effective than national governments acting on their own.

This does not only apply to the direct crisis response, which is now clearly the top priority. The EU will potentially be even more important in the aftermath of the COVID-19 crisis. In particular, when it comes to the economic impact of the crisis, a coordinated and robust action plan based on effective interaction between economic, financial, monetary and fiscal policies, and taking due account of different means, distributional effects and levels of vulnerability across EU countries, has the best chance of succeeding.

Alas, with some exceptions, the initial signs are not encouraging. The picture emerging seems to point mostly to nationally-focused actions, at times at the expense of other countries, for example when it comes to medical supplies. The EU and its members must get their act together: the European Commission should propose and the European Council endorse an ambitious plan of cross-border cooperation. Governments unwilling to comply must recognise that there will not only be naming and shaming, but that they are also putting the future of the EU at risk. If Europe fails to drastically improve its handling of the situation, the trust of its populations will (further) evaporate – with severe potential implications at both the European and national level.

Limiting the economic fallout

In addition to immediate crisis management, the EU must enhance its efforts to address the negative impacts on Europe's economies. Europe will inevitably take an economic hit, so the priority must be to prevent an uncontrollable downward spiral. In particular, the following actions should be taken:

  • Introduce a coordinated fiscal stimulus programme to stabilise the economy in the immediate future and create additional demand once the immediate crisis is (more or less) under control;
  • use EU funds proactively, including through means provided via the European Investment Bank (EIB), allowing for flexible exceptions to current spending rules;
  • relax state aid and procurement rules temporarily and allow exemptions to EU fiscal rules as long as there is a need to support the recovery of national economies;
  • continue loose monetary policy, including quantitative easing;
  • provide the EU with a temporary and capped ability to borrow, limited to unavoidable expenditure to address the current crisis;
  • prepare for a potential financial/banking crisis, including the possibility of a need for capital injections and delaying financial rules that might potentially restrict lending;
  • set up a credible safety net through the European Stability Mechanism (ESM) to deal with potential fallouts of the crisis;
  • find a swift agreement on the Multiannual Financial Framework (MFF) or, if this is not possible, prolonging the current one by one year to ensure that programmes will not abruptly terminate or start too late in 2021;
  • easing the business environment, especially for SMEs and self-employed, including quick up-front payment of fees, flexibility in accounting/write-offs, as well as tax and social security relief, especially for sectors hit hardest by the crisis (e.g. tourism, hospitality, events, aviation);
  • aim to prevent a further economic shock to the European economy in the near future by allowing the United Kingdom to prolong transition even if the decision is taken beyond the mid-year deadline.

The actions announced by Monday's Eurogroup, committing around 1% of EU GDP to an immediate crisis response, are a good start. Nevertheless, given the nature and scale of the crisis, they are only the beginning.

The right focus

Not only should there be additional funding to counter the negative economic effects, but there should also be a focus on how any additional resources are spent. The immediate emphasis must clearly be on the most vulnerable groups in society, in particular the elderly. But it will also be crucial to support families with children that are forced to deal with closures of schools and childcare. The self-employed will also need some forms of targeted support, given that many of them have lost almost all their sources of income overnight. Last but certainly not least, there is a need to ensure that pupils and students are supported in catching up on any education they may have missed.

The crisis should also be used to address the fundamental transitions which Europe is facing, especially the digital and sustainability agenda. Here, the crisis might help to accelerate some behavioural changes. For example, providing generous and wide-spread support to boost tele-working could have a positive long-term effect beyond the immediate stimulus it provides. Encouraging a shift of taxation away from work and towards negative externalities, such as CO2 emissions, could also provide immediate relief, with positive long-term effects for the climate.

Action, not procrastination

What is most important now is swift agreement and decisive action at EU level. While there is a chance that some funding might not be spent effectively or that some actions are ultimately unnecessary, the dangers of an insufficient, delayed and uncoordinated response are much higher.

EU institutions are trying their best to live up to this immense challenge. But it is now up to the heads of state and government to show collective leadership. The experience of the last decade has shown that the European Council plays a decisive role in times of crisis as a 'decider of last resort'. EU leaders must now show that they are actually ready to do 'whatever it takes' to master the multiple consequences of the COVID-19 crisis before things spiral further out of control. There is no time to lose.

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