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The governments of emerging European countries are facing a stark choice between two unwanted options, as they try to balance the risk to life of a new coronavirus (COVID-19) spike with the economic and human cost of a second lockdown.
Recent data on new coronavirus cases in the region show that a couple of months after the strict spring lockdowns were eased in most countries, new cases are rising again. With some exceptions, the steepest increases in per capita terms have been in the smaller, poorer states of Central Asia, the South Caucasus and Southeast Europe.
Over the week ending July 25, the greatest increase in per capita terms across the region was in its smallest state, Montenegro, which reported 951 cases between July 18 and 25, which is 151 per million inhabitants (Montenegro has a population of just 628,000) or one in every 660 Montenegrins.
There were increases of over 30 per 100,000 people in other countries in Southeast Europe — Kosovo (65), Bosnia & Herzegovina (56), Moldova (49), North Macedonia (48), Romania (34) and Serbia (31) – as well as the South Caucasus country of Armenia (85), and Kyrgyzstan (98) and Kazakhstan (62) in Central Asia.
There isn’t a direct correlation between how wealthy a country is and how serious their epidemic is – by far the largest number of cases are in one of the world’s wealthiest countries, the US. However, plotting GDP per capita against new cases in the last week, again in per capita terms, shows that while some of the poorer countries in emerging Europe have done extremely well in restricting the spread of the virus (Georgia and Mongolia stand out), cases are rising very fast in others. By contrast, the richest states in the region – the Visegrad Four, the Baltic states and Slovenia – have kept their outbreaks under control. While there are some worrying signs recently in the Czech Republic (which recently introduced new restrictions) and Poland, none of those countries reported more than 13 new cases per 100,000 inhabitants in the last week.
“Every government, or virtually every government, is faced with an impossible dilemma: if the economy opens too early, the risk of COVID-19 spread is high; if the economy stays shut, no industries or businesses will be able to survive for that long,” Jonathan Charles, the European Bank for Reconstruction and Development (EBRD) managing director of communications, summed up the choice facing governments in emerging Europe and elsewhere in a podcast titled Fiscal Policy and the Post COVID-19 Social Contract.
In the same podcast, Willem H. Buiter, former chief economist at both Citibank and the EBRD and a member of the Bank of England’s Monetary Policy committee, pointed to the greater challenge facing emerging markets economies. “Emerging markets are facing the crisis with a much restricted set of tools, both monetary and fiscal, so I see the drag on activity will be much more long-lasting there, and indeed evolving in a way that makes serious financial crises including private debt and also public debt virtually inevitable in many emerging markets,” said Buiter. “We are not out of the woods yet in many advanced economies, but we have not even begun to enter the woods in many emerging markets.”
These comments bear out the warnings made by economists at the start of the pandemic that the economic impact of the pandemic would fall most heavily on the states least able to bear it.
Back in March, the EBRD published a monitor looking at states’ vulnerability to external shocks in a variety of areas, as well as countries’ ability to implement fiscal measures to support vulnerable individuals and companies.
Numerous countries from first Central and later Southeast Europe issued so-called “corona bonds” this spring to allow them to finance extra spending during a year of decreased tax revenues, many of them to a warm reception from international investors. On top of this, the EU members from the region will benefit from the huge financial package agreed by EU leaders this month.
But not all countries in the wider region have the same options. “Fiscal space is already limited in many countries, in particular in the Caucasus, Central Asia and the southern and eastern Mediterranean. External financing needs are already high relative to reserves in several economies. Financial systems may also come under greater pressure in countries with already high levels of non-performing loans,” said the EBRD when it launched the monitor in March.
And it singled out Montenegro as having the least fiscal space among the Central and Southeast European countries. After heavy borrowing to pay for major infrastructure projects, the tiny Adriatic country’s debt-to-GDP ratio is around 72%, despite efforts to rein in spending pre-pandemic. It was named in a 2018 report by Washington-based think-tank the Center for Global Development as one of eight countries most at risk of debt distress as a result of borrowing from China under the Belt and Road Initiative (BRI).
From COVID-free to exponential growth
Until recently, Montenegro looked like it would emerge relatively unscathed from the crisis. The cumulative number of cases remained almost flat between mid-April and mid-June. As the final patients recovered, Podgorica was prompted to declare the end of its coronavirus epidemic at the beginning of June after 28 days with no new cases at all. Restrictions were lifted, the tourism sector started to reopen, and the government started a spat with Serbia by declining to open its border to its neighbour, which at that time was reporting several hundred cases a day.
Total confirmed coronavirus (COVID-19) cases to date in Montenegro. Source: WHO.
Then it all went wrong. The virus is believed to have been reimported to Montenegro by a traveller from neighbouring Bosnia, leading to a fresh outbreak. Podgorica immediately announced mandatory PCR tests and quarantine for arrivals from Bosnia and told people to start wearing face masks again, but the damage had been done. By July 25, the total number of cases since the beginning of the epidemic had doubled three times, to reach 2,659.
The government has tightened restrictions, including by making face masks mandatory both indoors and outdoors and limiting the size of gatherings. However, there has been no move to order closures of businesses; cafes and restaurants remain open albeit with restrictions such as a ban on self-service and a limit on the number of guests per table. Gyms can also continue to operate, though, with social distancing.
An EU donation of ventilators and PPE arrives in Montenegro. Source: gov.me.
As the EBRD monitor shows, Montenegro has limited fiscal space. Having issued a €500mn Eurobond in September 2019, it wasn’t among the Central and Southeast European countries that tapped the market with “corona bonds”. It has, however, just announced new economic stimulus measures that will be rolled out over the next four years.
There is also the political dimension. Montenegro is due to hold a general election on August 30. President Milo Djukanovic set the date in June, most likely to avoid a potential second wave in the autumn. In most of the elections so far this summer, the incumbents have benefited from a “rallying around the flag” effect. A second lockdown would clearly be damaging for Djukanovic’s Democratic Party of Socialist (DPS) as it prepares to extend its 30-year hold on power for yet another mandate. It would almost certainly mean the election being postponed, giving Montenegrins more time to feel the deeply negative economic and social impact of the pandemic.
Tolerance of the initial lockdown this spring had already been strained. The arrest of eight Serbian Orthodox Church priests in Montenegro, after they led thousands of people in a religious procession in violation of the ban on gatherings, provoked protests in several towns, which turned violent in Niksic.
Violent protests in Serbia
The experience of neighbouring Serbia also provides a salutary lesson for Montenegro. Serbian President Aleksandar Vucic announced a partial return to lockdown, including a weekend curfew in the capital Belgrade, on July 3, sparking night after night of thousands-strong protests that repeatedly erupted into violent attacks on police and state buildings, and demands for Vucic’s resignation.
While the protests were co-opted by far right groups, which are believed to have been behind the violence, they clearly reflected unhappiness that Serbia could be plunged back into a new lockdown, resulting in economic hardship and job losses.
Anti-lockdown protesters in Belgrade in early July.
Previously, Serbia had one of the world’s strictest coronavirus lockdowns, but almost completely lifted restrictions in May, after which life more or less returned to normal, with even events such as football matches played to crowds of tens of thousands allowed to go ahead. This allowed Serbia to proceed with the delayed general election that resulted in another landslide for Vucic’s Serbian Progressive Party (SNS) that increased its majority in the parliament.
However, there were signs even ahead of the vote that the number of cases was rising again, eventually prompting Vucic’s announcement of the new lockdown. The government later backed down over the curfew plans in response to the protests, but banned gatherings of more than 10 people in public areas in Belgrade, where 80% of all cases are registered. Also, all indoor shops and restaurants will have shortened working hours.
This leaves Serbia still struggling to deal with the seemingly relentless rise in new cases. As of July, hospitals in Belgrade were close to capacity, and there are fears the healthcare system will fail to cope with a further increase in infections. Field hospitals have been set up by the army in Belgrade and Novi Pazar.
Hundreds of doctors have signed an open letter saying the situation in the country is a “health disaster” and said the team dealing with the coronavirus crisis should be replaced. The letter also strongly criticised the lifting of restrictions ahead of the June general election. "The total abandonment of measures to fight the epidemic in the pre-election period (rallies, sports matches, tournaments, celebrations) caused the loss of control of the epidemiological situation and cannot be justified by professional reasons," the doctors wrote.
Earlier in July, Serbia’s Prime Minister Ana Brnabic set out the uncomfortable choice facing governments, saying that the government must fight for people's health, but also maintain balance in order to preserve the economy. She said she was against restrictive measures because a chance has to be given to the economy to survive.
“We had a healthy budget in March but now we have spent a lot to support economy and citizens, for more than 400,000 tests [for coronavirus]. From where comes money for respirators and PPE? That’s why we are trying to have a balance and I do hope we can do that because of the economy and I do guarantee that we will win this wave, economically too,” Brnabic said, N1 reported on July 8.
Similar dilemmas face the governments of the other Western Balkan states. Bosnia’s Muslim-Croat Federation, for example, declared an epidemic on July 17, but officials said it wouldn’t immediately lead to any new restrictions, even though COVID-19 cases in Bosnia are rising by around 300 a day and the prime ministers of both the Muslim-Croat Federation and Bosnia’s other entity Republika Srpska have caught the virus. Kosovo’s Prime Minister Avdullah Hoti tightened measures on hygiene and public gatherings on July 12 but said he would refrained from announcing a state of emergency.
A growing number of cases in Romanian industrial centres have pushed the debate over health vs. the economy to the fore as well. The number of new daily cases passed the 1,000 mark for the first time on July 22, and has continued to set new record highs since then.
A group of town and cities that make up an automobile cluster in central Romania – including Mioveni, the location of Renault's Dacia car plant and several car parts factories – came under monitoring for quarantine on July 22 as the number of coronavirus infections exceeds the safety threshold under new legislation that just came into force. However, the head of the local administration in Arges County where the automobile cluster is located avoided placing the 12 cities and villages that are currently under monitoring under quarantine.
bne IntelliNews’ Bucharest correspondent pointed out that "the economic impact of the sanitary measures tends to be increasingly taken into consideration”.
Another example of this trade-off is the situation at the YAZAKI group's car parts factory in the eastern part of the country, where 40 workers have contracted the virus. The local administration and the company management refused to close the factory “to avoid the social impact”. "We all seek to make an effort not to suspend the factory's activity, balancing the health and social impacts. We are talking about the largest employer in Braila County," said the head of the local administration in Braila County, Catalin Bobic.
Major outbreaks aren’t limited to the auto sector; at least 100 employees of the Freidorf slaughterhouse operated by Smithfield Romania have been infected with coronavirus and the company shut down all its three processing plants in Timis County, western Romania.
The government has also long been under pressure from the hospitality industry to lift restrictions, including allowing indoor restaurants to reopen, which is seen as a significant step in the relaunch of the tourism industry.
In contrast to its northern neighbours, Romania has considerably less fiscal space to put economic activity on hold or to pour money into restarting economic activity, Tatiana Bobrovskaya, associate director at rating agency Fitch, said during a webinar in early July. “Romania stands out [compared to the Visegrad Four] in terms of lacking that necessary fiscal flexibility to provide sufficient stimulus to cushion the economy. This is because of years of pro-cyclical fiscal policy.”
However, Radu Negulescu, CEO of Baia Mare-based tech company Trencadis, argued in an interview with bne IntelliNews that the reopening has gone too far in Romania and elsewhere in the world. “The lockdown is the only relevant measure that is proven to work in cases like this, so from my perspective, the fact that humanity moved too far with the reopening of the economy is enabling what’s happening today, the cases are starting to grow again. Romania was a county that apparently managed ok in the first stages of the crisis but now things have gone out of control,” he said. “Economies can be restarted. Lives cannot.”
Ukraine’s President Volodymyr Zelenskiy articulated the country’s quarantine fatigue on July 16, the same day that several hundred people from restaurant and nightclub businesses protested in the Black Sea city of Odessa over localised quarantine restrictions. Ukraine appears to have passed the peak of infections, with new cases slowing recently.
The national quarantine, which consists of minimal restrictions, should be extended for no longer than a month, or no later than August 31, Zelenskiy said on July 16, according to the presidential website. “There’s no need to rush with extending the quarantine for a long time. We need to act on how the situation develops. Everyone is already tired from this quarantine. Clear limits are needed on how we will extend it, so that people have the opportunity to live in safety, business could function and for the economy not to be on pause. So first we’ll extend it for a month, but not longer,” Zelenskiy told his daily coronavirus meeting.
Haves vs have-nots
The different approaches by the countries that have the funds to bankroll their populations through a lengthy lockdown and those that do not are perhaps most clearly illustrated by the differences between the oil exporters and oil importers of Eurasia.
In the South Caucasus, Azerbaijan – the richest of the three countries thanks to its oil and gas resources – imposed tighter new restrictions in Baku in June as the disease spread rapidly in the small but densely populated country. This followed a series of quarantine measures.
Neighbouring Armenia’s epidemic has been the worst in the emerging Europe region, so bad that Prime Minister Nikol Pashnian pointed out on June 26 that the country was “a world leader in terms of total confirmed cases of COVID-19 and new daily cases per million people”. He added that there was “no understanding” in Armenia about the seriousness of the situation.
The number of new cases has slowed somewhat since then, but was still the highest in emerging Europe in per capita terms in the last week after Montenegro and Kyrgyzstan.
Throughout the last few months, the debate about whether to lock down again has been unresolved. Officials have repeatedly expressed reluctance to reimpose restrictions due to the damage they fear this will cause to the economy, one of the poorest in the wider region.
Pashinian warned in early July that a second lockdown could be imposed if the country’s healthcare sector became unable to cope with new coronavirus cases, Arka reported. He said his government was ready to take “decisive steps” to combat the virus, yet acknowledged the damage a new lockdown would cause to the economy – he previously said it would have a “lasting and catastrophic impact” – and urged people to change their behaviour to avert a second lockdown.
As a result, virtually every enterprise is open in Armenia, including restaurants, bars, shopping malls, gyms and swimming pools, reported Eurasianet, though masks are mandatory and the authorities have shut down thousands of enterprises for violating the regulations.
There is a similar split between the “haves” and “have nots” in Central Asia.
Kazakhstan was able to impose a second lockdown – albeit not as severe as the first – when cases were rising rapidly, as it has the financial resources to do so. It started on July 5 and was later extended until the end of the month, as officials warned hospitals were running out capacity to offer beds to coronavirus patients in a critical condition.
Uzbekistan followed, announcing a second lockdown after also reporting an increase in new COVID-19 cases since it eased the initial lockdown in May and June. From July 10 to August 1, Uzbekistan will close non-food shopping malls, markets, parks, cafes, restaurants and sports and entertainment venues, as well as limiting the movement of vehicles, Reuters reported. Domestic air and rail travel have been halted until August 1. However, as in Kazakhstan, the second lockdown is less strict than the first, when all non-essential businesses were closed down.
Kyrgyzstan is also struggling with steadily increasing cases, of around 1,000 a day for the last week. Local medical centres have become overwhelmed with cases, reports from the ground suggest. As of July 25 there were at least 12,072 patients in hospital with COVID-19 and community-acquired pneumonia.
The government has announced plans to build new 100-bed infectious diseases hospitals in Bishkek and Osh as part of efforts to stabilise the epidemiological situation. Bishkek has also been trying to secure supples of drugs, including from donors, and took steps to prevent smuggling of medicines and medical equipment to neighbouring Kazakhstan.
However, Kyrgyzstan has not returned to lockdown, and shopping centres, supermarkets and markets are allowed continue working, according to Bishkek city hall (where the worst outbreak is), even though officials urged citizens to observe social distancing, wear masks and not go out unnecessarily. On the other hand, the first quarter of the new academic year in schools is planned to take place online.
However, the decision not to lock down economies a second time could lead to bigger economic problems later on.
This was the view taken by Georgia, where the authorities decided not to loosen restrictions as much as some in the tourism industry wanted, calculating that the cost of giving the virus a chance to spread would be greater than that of losing out on tourism revenue this summer. This caution has enabled Georgia to count no more than 1,117 cases since the start of the pandemic.
In other states, where the virus has already spread widely and which like Armenia or Kyrgyzstan don’t have the resources for a second lockdown, there’s an acceptance that they are having to live alongside the virus. Ultimately the painful choice may seem like no choice at all.
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