The EU Post-COVID-19: Regulating for Recovery and Revival

The EU Post-COVID-19: Regulating for Recovery and Revival

May 5, 2020, Covington Alert

Every new team entering the Berlaymont to head up the European Commission starts out with bold and ambitious plans. Time after time, reality intervenes, and their plans are upended.

This was true for the second Barroso Commission in 2010, when the aftershocks of the Global Financial Crisis and the Greek and Euro crisis that followed came to dominate their agenda.

In 2015, it was the refugee crisis that the Juncker Commission had to confront. In late 2019, Ursula von der Leyen set out her ambitious regulatory agenda for the next five years. She outlined a European Green Deal, whereby the EU would show leadership on global climate issues and the circular economy. She presented ambitious plans for a digital transformation in Europe, and spoke of “a geopolitical Commission,” with the EU claiming its place on the global stage.

But then came COVID-19—slowly at first, and later with breath-taking speed and strength. Now the global economy is in lockdown, globalisation has been stopped in its tracks, and Europe and the world face a recession that seems unparalleled in almost a century, with no certainty as to its course. The health crisis remains unpredictable, and the severity of the economic crisis is accordingly difficult to predict—but that there will be profound political consequences is beyond doubt.

The EU will need to rebalance its priorities, but the green deal, the circular economy, a revision of FDI rules and a focus on big tech will remain prominent features of the EU’s efforts to regulate the post-COVID-19 world.

Europe Divided

The COVID-19 outbreak threw the EU back into crisis management mode—as in 2010 and 2015, but this time with a greater array of challenges. For the EU, the ultimate political impact of this pandemic could turn out either way: a severe economic and political crisis with uncertain consequences, or a reinforcement of solidarity and common action. If the pattern of previous European crises is repeated, we could well see the first followed by the second.

The economic challenges the EU faces are severe. It is clear that 2020 will see a sharp contraction of the European economy. ECB President Lagarde has given estimates ranging from -5% to -15%. What happens thereafter is highly uncertain. When the IMF presented its April 2020 assessment of the global economy, its baseline assumption was of a return to 4.8% growth in the EU in 2021—but it did not exclude the possibility of a further 3% decline.

The EU must also contend with significant internal challenges. Early on, the EU single market came under substantial threat, as even bulwarks of European integration such as France and Germany restricted trade even with their European neighbours in products that they deemed essential for their national health services. Yet no country can be self-sufficient in these areas. Gradually, and sometimes reluctantly, intra-European trade restrictions are being lifted.

The Commission was also forced to lift restrictions on deficit spending by Member States, and on handing out state aid to industries on the verge of collapse. Competition policy seemed to have been relegated to the back stage as survival became the dominant instinct.

Meanwhile, action to shore up the European economy through massive financial support schemes has been primarily national. Expectations for substantial European assistance remain high—particularly in Italy and Spain, which were hit especially badly by the pandemic. The scale of European action to date has fallen rather short of what they had hoped for. A divide pers ists between the northern and southern Member States: the former continue to resist the large scale mutualisation of debt, while the latter see this as necessary if they are to avoid the lingering harm that has persisted in the south since the Global Financial Crisis.

The “geopolitical Commission” must also contend with a changed world. The U.S.’s retreat from the world stage, and its challenges to international institutions of governance, leaves the EU more exposed as the leading advocate for the rules-based international order. This could present an opportunity for Europe—but one that it is not easy to seize. Meanwhile, China— which the EU has described as a “systemic rival”—seeks to reassert its own position on the world stage. Distrust of China’s motives, of its economic, technological and political influence globally, and questions around its handling of the pandemic, all create tension.

Regrouping

After a couple of difficult months, the EU has reasserted its role in leading at least part of the European response to the pandemic. The Member States have agreed in principle on a large European support package. But while differences between Member States have been narrowed down, much remains to be done to secure an agreement. The EU will set up a Recovery Fund, for which the Commission must now present a concrete proposal by early May. It will need to find a pragmatic solution to the same differences it has faced as on the European budget— “budget hawks” in the north, and supporters of its expansion in the south. This time, it has one more string to its bow: that agreement is now essential to the EU’s economic recovery.

The EU’s Recovery Fund will in all probability be very substantial, with a mix of loans and grants, and linked closely to the multi-year common EU budget. Agreement on the Fund will pave the way to deploying the European Investment Bank’s full firepower, and drawing on the European Stability Mechanism. Meanwhile, the ECB has taken action to secure the European financial system—ensuring the health and financial crises did not spill over into a fiscal crisis.

After some initial hesitancy, the Commission has also launched an ambitious effort to deliver help to the countries and regions in its neighbourhood. This is not only a question of countering the Chinese “aid offensive,” but also one of self-interest: a pandemic must be fought abroad as at home, if we are to defeat it.  

The Commission has also played a crucial role in ensuring supermarket and chemists’ shelves remained stocked across Europe. As Member States closed their borders, often 24-hour queues formed at major crossing points. The Commission quickly brought Member States together around a protocol for “transport green lanes,” expediting freight transport over Europe’s internal borders.

There are also lessons that the Commission must learn from its immediate response to this crisis, if it is to bolster its credibility. The EU institutions must be better able to help Member States overcome shortages and other challenges in the health sector. It will also need to improve its existing crisis management mechanisms, which were not deployed as they might have been.

Planning Ahead

Looking further forward, the Commission’s plans for the next five years will doubtless be reshaped by the recovery from COVID-19. However, the regulatory framework it presented in the autumn remains the structure through which it will channel these efforts. With the COP26 global climate conference postponed, the immediate urgency for the EU to take a leadership role on green issues has subsided somewhat—and in this lockdown year, global emissions will be down substantially.

Yet the Commission will seek to build the European Union’s plans for a recovery around the various stages of the proposed Green Deal. This is likely to gain support from European citizens—as French President Macron put it, “when we get out of this crisis, people will no longer accept breathing dirty air.” And though the difficult decision on emission targets for 2030 may be delayed—both because of the limited bandwidth at EU Summits and in view of the postponement of the COP26 global conference—this politically sensitive decision will have to be made sooner or later.

The pandemic has once again highlighted the dependence of global supply chains on China. In Europe, we can expect to see a reaction in the form of heightened focus on recycling, reuse and recovery of materials, and the circular economy more generally. The Commission published its Circular Economy Action Plan on March 11, as various European countries entered lockdown. This will likely play an important part in its plans for Europe’s recovery.

On the digital scene, the Commission’s ambition had seemed, more or less explicitly, to establish the EU as a thought leader in the digital age. Some saw this as a regulatory response to the “techlash” call to “tame” supposed powers of large (U.S.) digital corporations. Yet this period of physical lockdown has seen the widespread adoption of digital tools—whether for work, to keep in touch with friends and family, or latterly, to facilitate pandemic tracing and the careful opening up of our economies. Commission Executive Vice President Vestager, and Internal Market Commissioner Breton, have stated clearly that the Commission’s tech regulatory plans remain unchanged. It remains to be seen whether the constructive role that “big tech” has played in the reopening of the world’s economies has any impact on regulators’ stance.

The European Commission has also encouraged Member States to be at greater pains to screen new foreign direct investments. Such funds might be attractive for companies that have suffered heavily from the crisis, but could cost Europe yet more of its technological and economic autonomy. Yet these proposals must also maintain a balance between resisting state- sponsored buyouts of key companies on the one hand, and enabling badly-needed investment in Europe’s future on the other.

Adjusting to the New Normal

There will be no quick or easy return to normalcy after these months of lockdown. This will hold true even in the most optimistic scenario, where the health crisis subsides fast, and a vaccine emerges later this year. For the EU, it will not be easy to swiftly re-establish the respect for single market rules, with the freedom of movement of goods, services, and persons—once it is safe to do so. Yet this integrated market is key to the EU’s economic success. The challenge will be to make the EU’s single market framework more resistant to future shocks.

To come out of the crisis unscarred, and play its proper role in the economic recovery, the EU’s usual enforcement of state aid rules will need to be re-established quickly, much as was done in the financial crisis of 2008-2012. This will undoubtedly be politically difficult for Member States, notably in respect of the airline industry. State aid will be an essential tool in preventing harm and securing the recovery, but weakening the rulebook for industries with pre-existing problems risks throwing good money after bad.

Yet the EU’s first priority must be the Multiannual Financial Framework, the Union’s seven-year framework budget. Just as the crisis erupted, the Member States were haggling over the eventual shape and size of this budget. They have now agreed that the proposal on the table should be revised, with substantial sums set aside for the economic recovery. The EU will probably need a higher overall budget, but will also need to curb its ambitions in some areas. The “frugal” northern European countries trying to hold back spending will have to retreat somewhat.

The ambition of a “geopolitical” Europe remains, but the world is changing. U.S.-China tensions are heightened. Other than the WHO, the UN’s core organs have hardly been seen in this crisis. Contrasting the G20’s response to this crisis with that in 2008 is perhaps indicative of the changed world in which we live: in 2008, it was swift to issue joint statements; in 2020, its response has been lacklustre at best, leaving it but a shadow of what it once was. Europe’s flagship geopolitical event of this year was to be a September summit between China and the EU Member States. This now looks very much in doubt.

Berlin to the Rescue, Again?

This autumn will be decisive in many respects. Will a credible comeback be possible? Will a resurgence in the pandemic lead to further economic harm? And can Brexit issues—which remain fraught—be resolved, before a new, steep cliff edge approaches at the end of the year? These and many other challenges will test this new Commission’s resolve.

This past year has seen Angela Merkel’s distinctly unsuccessful effort to resign as leader of the German Christian Democratic Party. But her designated successor threw in the towel, and now it will not be possible to elect a new candidate until at least the end of this year. In July, Germany will once more assume the Presidency of the Council of the EU—an EU with regulatory ambitions that resonate with German priorities. It is after all not surprising that the policy priorities of Ursula von der Leyen—Chancellor Merkel’s one-time protégé and the first German Commission President in half a century—would chime with those of a government she left only months earlier.

Germany will find an EU that is more deeply in crisis even than when it last held that post in 2007, in the wake of the failed “Constitutional Treaty.” Now, as then, the EU will look to German leadership to right the ship. Now, as then, Angela Merkel will be called on to take centre stage— her task: to drive the recovery, and revive the EU.

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