Coronavirus response turns EU agenda upside down

Karel Lannoo

6 de Junio de 2020, 19:12

The EU is facing a big transformation, even bigger than the one following the financial and sovereign crisis 10 years ago. But for this transformation to work, leadership and imagination are required, plus foresight on the part of its members. Insularity and withdrawal of European states into themselves will not help combat a crisis that only highlights the need for more cooperation, and a European response. The lacklustre example of Brexit may help the 27 member states move in this direction, but it is not a given. A profound and new agenda is required for the coming years to combat the downturn. But the first steps are being taken.

Coronavirus has reset the plans of the European Commission. President von der Leyen’s had just accomplished the symbolically important first 100 days when the pandemic struck, meaning she could start over again, or move to crisis mode and forget the long term. Objectives such as those for a geopolitical Commission, an EU industrial policy and strategic autonomy now have a different meaning. They are more important, but also more difficult to accomplish. Priorities will need to be shifted to underline the EU’s raison d’être, to make clear that it is there for the big picture issues. This crisis should serve as a wake-up call to member states that there is a need for EU-wide planning to face global threats. Whether this comes to pass is another matter.

Many parallels can be drawn with the financial and sovereign crisis, as well with the limited powers of the EU Commission and the pre-eminence of the member states, the existential threats to the EU, and need for drastic structural solutions for the EU to remain relevant. Parallels with the previous crisis should also be drawn at the level of solutions, such as the central role of the ECB and the creation of supranational entities like the European stability mechanism (ESM) and the single supervisory mechanism (SSM). To some extent, the EU has started to do this, for the short term, with the ECB’s announcement of the Pandemic Emergency Purchase Programme (PEPP) and the agreements reached in the European Council on 23 April 2020. For the longer term, the foundation may be laid in the coming weeks with the new multiannual financial framework (MFF), the EU’s seven-year budget. Once this is done, the hard work can start to adapt EU policies, and possibly also the EU Treaty, as was done for the ESM.

For a broader public, the EU’s toolbox continues to be mired in complexity and opacity, which impedes communication. Also, once again, the EU’s response is seen as inadequate, and the EU is blamed for all kinds of shortcomings. The criticism is most acute in Italy, where the EU is blamed for a lack of solidarity, even though health policy is fully a national or local competence which is reflected in tumbling support polls for EU. More broadly, it is a reflection of the lack of a European public opinion, which is especially acute in times of crisis, when progress has to be made swiftly. Debates are steered through national media, newspapers and media channels, and there is hardly any Europe-wide debate, or only among a few.

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Looking at the initial reaction to this crisis, the failure to respond adequately is something for which Europe collectively can be blamed. Almost all EU states reacted late, minimised the threat of the pandemic, or were naïve and ignorant about its possibly devastating consequences. A few states managed to contain it before being hard hit, only after they saw what was going on in northern Italy. But this happened more than a month after the first cases were reported in a ski resort in France, at the end of January, which did not lead to a decisive response.

The EU as an institution did not react promptly to the crisis either. Health policy is not an EU competence; it has only coordinating powers, or can request member states to inform the EU about measures they adopt when dealing with health crises (Art. 168.2 TFEU). Nevertheless, the EU entities in charge were almost absent in the early crisis weeks of 2020, when the pandemic raged in China and started in Italy. The European Centre for Disease Prevention and Control (ECDC), which is the official "EU agency aimed at strengthening Europe defences against infectious diseases", hardly gave any advance warning. The Commission, which oversees the EU agency, has also been constantly behind the curve on the threat of the pandemic, and the implications it could have on EU economies and EU freedoms. DG Santé, the EU Commission’s directorate general in charge, was silent. It was only from mid-March onwards that the Commission President, a medical doctor, and the European Council President started to act, and then the EU institutions switched to crisis mode. By that time, the situation in northern Italy was already dramatic.

Looking at the disastrous economic consequences, it is clear that the EU will need to have a greater role, also in healthcare. Healthcare cannot be disconnected from the other areas of EU competence, such as the single market, trade, competition, and civil liberties. The way member states have reacted to this crisis in limiting personal movement and trade in a very disjointed and haphazard manner weakens the EU. It has profoundly undermined the EU rights and freedoms of individuals and the rule of law, going against fundamental principles of proportionality and non-discrimination.

To act as an economic bloc, the EU will need to have stronger prospective and coordinating powers to manage pandemic risks. It will need to look more closely at healthcare budgets as part of economic governance, to map its medical and pharmaceutical capacity, and to coordinate Europe-wide research efforts on biotechnology. If EU countries are to pride themselves on having the strongest social security system in the world, they had better act together to protect it.

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On the governance side, the EU has already started to look into social security expenditures, as part of public finance monitoring, but more for an austerity perspective. In future, this will need to go deeper to detect huge discrepancies between member states and to allow for efficiency gains in healthcare expenditures. In recent weeks many European citizens have been made aware of enormous differences in practices and capacities in public healthcare in the EU. This will need to become much more aligned, and best practices promoted. An EU Treaty change should not be excluded to give the EU more competences, as non-cooperation led to the entirely uncoordinated reaction. It also led to huge restrictions on the movement of persons and goods, causing serious damage to the internal market and the economy.

The EU Treaty currently states explicitly that "Union action should cover the fight against the major health scourges, by promoting research into their causes, their transmission and their prevention" (Art. 168.1) and encourages and promotes cooperation between member states. There has been little evidence of this during the Covid crisis. Cooperation was extremely limited –member states consider healthcare a purely national competence– and EU interference in this matter is not tolerated. This was clear in the diversity of standards applied, the wide differences in the methods and variety in reporting of cases. Even if quality of healthcare continues to diverge as a result of the differences in purchasing power in the EU, the monitoring of public health matters should be comparable all across the EU. The same effort should be made, as with the Maastricht Treaty, to make public finance data comparable across the EU. The current situation has only led to limited awareness about the outbreak of the disease, confusion, and incapacity to act. Often, it has also led to false comparisons between states’ efficacity in combating the crisis.

A fundamental re-design of the role and functions of the European Centre for Disease Control (ECDC) should be a top priority. Even after several months into this crisis, many Europeans never heard of this EU agency and its director, unlike the US CDC (Centers for Disease Control and Prevention) or the National Institute of Allergy and Infectious Diseases (NIAID) of Dr Fauci. The Copenhagen-based agency, with an annual budget of €59 mn (2020) and a total staff of about 270 persons, should follow the model of the European Systemic Risk Board created after the financial crisis, and the central role of the ECB in also monitoring financial risks. Pandemics are systemic; they create domino effects and should be tackled at source through advance monitoring of diseases all around the globe and the related movement of persons. It is obvious that for a small geographical area like Europe, this can better be done by pooling expertise rather than having it scattered over many different states. This will certainly benefit smaller states, of which there are many in the EU. The revamped ECDC should become the central body to warn for pandemics and to recommend what measures should be taken. It should therefore be composed of a council of experts that can decide with the necessary authority, following clear procedures. The agency should also be represented at global level in the relevant international bodies, to start with the WHO. This will all require substantial changes to the functioning of the agency.

Another reason for greater European coordination of healthcare is the geopolitical dimension. The EU needs a much closer monitoring of the value chains in pharma and medical equipment, and have a view of its capacities and strategic autonomy. In a world of growing trade tensions and declining weight of the multilateral order, too much dependence on third countries can put public healthcare at risk, as we saw at the peaks of the crisis. It can also be exploited by third countries for favours, or to undermine the EU legal order. For its part, the EU needs to pool forces to control the developments of vaccines and get the necessary supplies. It was recently reported that the largest EU-based pharmaceutical company would first supply the Americans with vaccines, as the US invested most through Barda, a federal biomedical research authority. It protects the industry, but requests supplies for the home market in return. The company’s CEO suggested the EU should create something similar.

The EU and its close neighbours host a large and vibrant medicines sector, but a publicly available monitor or factbook does not exist. European pharma groups form half of the top-ten market capitalisations, and their combined weight in the total market cap dominates European stocks. But for about 25 years the sector has been delocalising research and outsourcing production to other countries, diminishing Europe’s leading role and endangering its autonomy, thereby creating dangerous dependencies on third countries. Today, one in two new treatments comes from the US, the Chinese share is growing, whereas Europe’s has declined. A mapping of the capacities of the European pharmaceutical industry, a form of consolidated balance sheet of their assets, but also their dependencies as a critical industry for European’s healthcare, is required. The industry is closely intertwined with the national health administrations, because of the often heavy price subsidies, which vary largely across markets. In addition, prices are set as a function of local purchasing power, and there is no single EU-wide price. The European Medicines Agency (EMA), which authorises medicines for the EU market should, together with the European Commission, play a central role here.

These considerations underline the need for a European industrial policy, an old debate that has started to haunt European policymakers again, in this case in the domain of pharmaceuticals. The EU presented its latest industrial policy plans on March 10th, but this communication was not drafted with the current health crisis in mind. It focuses mostly on the green and digital transition, and the need for strategic autonomy. It hastily adds that also an EU pharmaceutical strategy will be worked out by the end of 2020, in view of the health crisis. This will cover ensuring critical supplies and innovation. This however raises the question whether Europe can do it as compared to its member states, which have the full competence in this domain.

An industrial policy for pharmaceuticals may however go against the objective of the free trade agreements (FTAs) that the EU has recently concluded, which is to reduce tariffs and non-tariff barriers, and thus encourage trade, hence growing international dependencies and value chains. In the financial sector, an exception is allowed for market liberalisation in a prudential carve-out –the same should be considered in pharma, but at EU level. FTAs also enforce intellectual property rights or patents of the large pharma companies, mostly based in the rich countries, at the expense of developing countries. An old debate, which is certainly resurfacing with this crisis.

The EU has done a great deal to create an environment for the approval of medicines, which is carried out by EMA, the agency that recently moved from London to the Netherlands as part of Brexit. It also supports research into the development of new medicines, through public/private partnerships, and with the support of European funds. However, as with healthcare, the main levers are in national hands, where the bulk of funding support is based.

The Commission science hub, the Joint Research Centre, which employs about 3000 persons, is mainly focused on the areas falling within the EU’s competences, with very little attention to healthcare. The EU’s research programme, Horizon, has important funding lines for biotech and cooperative research, also for the private sector. The current Horizon programme (2014-2020) has €2.1 bn for the core funding programme in this domain, through the vaccination research and support for the Innovative Medicines initiative (IMI), which is co-funded with the private sector. But this is less than what is needed under realistic assumptions for the EU for a few vaccines. Vaccine research is costly and long term, with a limited success ratio, it is obviously better done in close collaboration with others. This could be alleviated through the issuance of vaccine bonds, the research costs of which could be borne by a broad group of investors, public as well as private.

Europe is a hotspot for biotech research, but the landscape is very fragmented, with uncertain focus-setting. This is demonstrated by the fact that this does not correlate with patents for new medicines: the United States generates about three times as many as Europe and China about nine times as many. European biotech companies were responsible for 13% of the new drugs approved by the US Food and Drug Administration in 2017 and 2018, while US biotechs were responsible for 78%. However, Europe’s share of new drugs could grow if its biotechs were able to attract more investment; they currently receive only 20% of the funding of their US counterparts. And 98% of follow-on offerings by European biotechs have been on US rather than European exchanges. The lack of an integrated and performing capital market in the EU is another impediment to its performance, also for the biotech sector.

A European data strategy is an important part of the EU’s industrial policy, where also the interests of the pharmaceutical sector come into play. Here again, the ambitions for a European digital age were drafted without the health crisis in mind, and show the practical difficulty of the project. European data in European hands sounds wonderful, but a health crisis shows the need for an immediate reaction capacity, which does not exist. Or member states go their own way, for lack of a European solution, or the data end with Big Tech, which is US based, as the tracing apps debate has demonstrated. In both cases, the European market suffers.

For the EU pharma sector specifically, there is no EU single data market, as it is held up by the national public interest provisions, or even more by lack of national data spaces for healthcare, because of differences in views on privacy and different degrees of automation in healthcare. The emblematic EU General Data Protection Regulation (GDPR) seems to be a hindrance to the development of an EU healthcare policy.

And there is the social dimension. The current crisis does not hit Europeans evenly. While overall Europe has the most generous public healthcare system in the world, early data on the coronavirus indicate that it affects mainly the elderly, the weaker, the less educated and poorest. Work was already underway for an EU-wide minimum wage, or a back-up for the national unemployment schemes, which will undoubtedly be accelerated with this crisis. But other aspects will move up on the agenda as well.

More generally, the current pandemic is a huge challenge for the EU’s ambition to form this ever-closer union. Cohesion between regions and countries is affected, as it seems that there are huge differences in healthcare, and even more as this impacts the public finance situation and the interest rate spreads on public debt. The ECB massive securities purchase programme (PEPP) can temporarily address this issue, but long-term solutions will have to come from other institutions, and for a substantial increase in the EU budget. This was proposed in the EU Commission’s Next Generation budget on May 27, with a huge budget increase for cohesion policies.The current crisis thus requires a major re-think of the EU’s policy priorities for the coming five years. It seems that the EU Commission, in cooperation with its member states, is on the way towards profound change, but this will require cooperation at all levels, and a positive outcome is not guaranteed. The joint announcement by the French President and the German Chancellor on May 18th is a sign that there is a willingness to get things done. The European Council will now need to approve the EU budget for the next seven years, which is the basis for a deep change of EU policy making in the years to come.


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