COVID-19 strengthens EU drive for economic sovereignty

Subject EU economic sovereignty. Significance COVID-19 is increasing momentum within the EU to enhance the bloc’s economic and strategic sovereignty by substantially reducing dependence on non-EU powers, particularly China. While the immediate concern is to become more self-sufficient in medical and pharmaceutical production, leaders are also set on strengthening European sovereignty in critical sectors including technology and automobiles. Impacts A strong economic recovery will be important in determining an EU consensus view concerning the bloc’s main economic competitors. Public investment in the private sector will provide greater economic stability, but more state influence on supply chains and investments. Scepticism of China will become a growing feature in European politics.

Significance The three parties successfully negotiated a coalition agreement with a strong emphasis on modernising Germany’s economy. Throughout the negotiations, the parties presented a public image of stability and harmony, yet several divisive issues will test the new government's stability and effectiveness. Impacts The composition of the new government will make it harder for Berlin to win approval for the EU-China Comprehensive Investment Agreement. Chancellor Olaf Scholz will seek to prioritise more unity at the EU level when it comes to foreign policy decision-making. The spread of the Omicron variant will slow economic recovery and potentially delay the transition to a greener economy.


Significance Mounting concerns that a faster-than-expected global economic recovery from the COVID-19 pandemic will spur inflation, forcing the leading central banks to signal an earlier-than-expected withdrawal of monetary stimulus, have contributed to renewed pressure on the lira. Although Turkey is less vulnerable than it was in 2013, it is still acutely susceptible to a sharp deterioration in risk appetite. Impacts Policy tightening in the fourth quarter will probably be reflected in lower growth in the current and later quarters. Provided the coronavirus threat fades and vaccination proceeds apace, the prospects for tourism and some service sectors will improve. Base effects and financial and economic stability may allow growth of 3-5% in 2021, despite lira volatility and high corporate debt levels.


Significance Portugal is set for the best five-year period of growth since the turn of the millennium, unemployment is falling and public finances are showing positive signs. The upswing is reflected in the remarkable stability of the political system. Impacts The economic recovery is likely to drive down yields on government bonds. Centeno’s appointment as Eurogroup president will raise Portugal’s standing in the EU. Security concerns in many Mediterranean countries are likely to boost Portugal’s tourism industry.


Subject Chinese 'sharp power' in Europe. Significance Beijing is pursuing its foreign policy agenda in Europe using ‘sharp power’ tools, inserting its voice into the European media sphere and attempting to shape the tone and content of output by Western think tanks and universities. It is also using its economic leverage to undermine EU unity on disputes between China and the major European countries. Impacts Smaller EU economies are most susceptible to Chinese influence; they may exploit fear of China to win concessions in Brussels. Major European media outlets will remain effective watchdogs. Europe did not traditionally share US geopolitical concerns about China’s ‘rise’; Chinese interference in European politics changes that. A less mercurial US administration would find much scope to cooperate with the EU to counter China’s illiberal influence. Exposure of ‘sharp power’ efforts will worsen the suspicion Chinese firms and individuals face on account of presumed government links.


Significance However, the economic and geopolitical environment which facilitated its global regulatory success is changing. Impacts The EU’s unprecedented economic recovery plan should strengthen unity and give it confidence to act stronger on the global stage. Political values will play an increasingly prominent role in shaping the bloc’s relationship with countries such as China. The election of Democratic candidate Joe Biden will not guarantee closer regulatory ties between the United States and the EU.


Subject The Belize economy. Significance Belize’s economic recovery is stagnating following a severe drought that has had a harsh impact on agriculture and hydropower generation. The situation has been compounded by a slowdown in tourist arrivals following years of buoyant growth, reflecting weaker global expansion and the grounding of Boeing 737 MAX aircraft, which service the country. Impacts The current account deficit will remain large, with international reserves averaging just three months of imports. The primary surplus will narrow due to increasing spending on wages and public investment and weaker-than-expected revenue. This being an election year, cuts to current expenditures will probably be off the table, limiting debt reduction in the short term. Funding constraints will hit the government’s ability to pursue much-needed reforms in infrastructure and education.


Subject COVID-19 impact on Spanish politics. Significance Spain is one of the world’s worst-affected countries by COVID-19. Its economic recovery will also be slower and more disjointed than elsewhere. In order to address these unprecedented challenges, Prime Minister Pedro Sanchez is seeking to negotiate a cross-party agreement -- known as the Moncloa Pacts -- involving all non-extreme parties. The talks aim to create a broad political consensus over how to tackle Spain’s social and economic reconstruction, making it easier and faster to implement policy. Impacts A bipartisan pact would likely boost Sanchez’s public support, given that he is the leader pushing for national cooperation. The existence of a pact would strengthen Sanchez’s push for the EU to share the burden of economic reconstruction. The EU’s failure to implement a coordinated economic plan for the reconstruction period would fuel Euroscepticism in Spain.


Significance The minority Socialist Party (PSOE) - Unidas Podemos (UP) government needed the support of several left-wing and pro-independence parties to get the budget through. Its approval makes early elections unlikely and gives the government a better chance to shape the COVID-19 economic recovery and implement some of its 2019 electoral pledges. Impacts Spain’s poor record in absorbing EU funds suggests it will struggle to make the most of the EU recovery fund. The weakening of the UK currency will hurt Spanish exports to the United Kingdom, especially with fewer UK tourists coming to Spain. Greater political stability will enable Spain to pursue a more assertive foreign policy.


Subject Potentially interesting IPOs in Kazakhstan. Significance On November 24, Kazakhstani Deputy Foreign Minister Alexey Volkov said that a new round of large-scale privatisations would help stimulate the development of the private sector. Given that the price of oil is likely to stay low for some time, optimisation of public spending is a key priority for Astana. The government's planned exit from state-owned enterprises should also bolster the latter's management and profitability. Impacts The privatisation programme may enable the government to refocus efforts on economic recovery. Corruption will remain a principal obstacle to the successful implementation of privatisation plans. Proximity to political influencers will be a valuable asset for foreign investors keen to partake in the privatisation drive.


Subject Nigerian economic platforms. Significance The two main political parties in the 2019 presidential elections have released their campaign manifestos, both focused on similar themes of economic development and jobs creation. The governing All Progressives Congress (APC) envisages an expanded role for government in driving the economy while the opposition People’s Democratic Party (PDP) has outlined a private sector-led framework. Neither approach is likely to achieve their vast promises. Impacts The exchange rate is unlikely to be fully liberalised regardless of who triumphs. International investors have largely written off the chances of a full economic recovery if Buhari wins a second term. Abubakar's previous political flip-flops could sow doubts over his commitment to market-based reforms. A strong performance by technocratic candidates could signal growing voter appetite for change beyond the established parties.


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