COVID-19: assessing the political fallout

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●  A watershed event: The COVID-19 pandemic and the ensuing mega-recession may shape political debates and choices for a long time. Crises of such a scale can make or break leaders. In this report, we offer some tentative observations about potential global consequences and the political outlook in key countries of the advanced world.

●  Peak populism? The pandemic is taking a particular heavy toll on countries whose overconfident leaders trusted their political instincts more than sound advice, at least initially. Some countries with a calmer and more science-based response are faring better. This may make it more difficult for populists to peddle their fact-defying slogans in the future. However, the costs of the recession fall heavily on less skilled service workers and new entrants to the labour market. This may cause new problems.

●  A leaderless world: All of the major global players, the US, China and the European Union, got their initial response to the crisis partly wrong. So did many second-league players, such as the UK and, much more badly, Russia and Brazil. An even more fragmented world could be a more dangerous place, especially if the US continues to weaken global institutions, as well as its own soft power.

●  Advantage Biden? In the US, President Donald Trump is no longer the favourite to win the election on 3 November. If Joe Biden makes it into the White House instead, he may pursue a more centre-left policy agenda as the Democrats would have a good chance to win a majority in both houses of Congress. The resulting mix of more domestic regulation with a calmer foreign and trade policy may sour the economic mood in the US but still come as a relief to other parts of the world.

●  Risks to the cohesion of Europe: With a belated decision to promote a generous €750bn recovery fund, Germany may be helping to rein in the surge in anti-EU sentiment in parts of southern Europe. However, the future cohesion of the EU looks a little less secure now as the initial impression of insufficient solidarity in the critical months of March and April may linger.

●  After Merkel: Thanks to luck and a deft policy response by Germany’s centrist coalition, the risk that a Green-left-left coalition could take over in Berlin in late 2021 has receded a little. But it has not vanished. The weakness of the small liberal FDP, which may struggle to stay in parliament, could be a bigger factor than the rise of the right-wing AfD, which has stalled.

●  Political risks have risen in France. We still believe that Macron’s earlier reforms have strengthened the French economy significantly. But his reform momentum has stalled. We now see a risk that the reforms may not suffice to deliver a golden decade for France in the 2020s. Political risks remain elevated in Italy and Spain.

Holger Schmieding

Chief Economist

+44 7771 920377

holger.schmieding@berenberg.com

Disclosures

This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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