On Feb. 17, we said America is Winning the Vaccine Race. A month later that assessment has proven spot-on. While the United States administers more than 2 million shots per day, nearing 3 million, Europe is descending into a new COVID-19 nightmare.
The situation looks dire in Europe, with a “third wave” of COVID now sweeping the continent. Italy has entered a third national lockdown. Poland — the EU’s fifth-largest nation by population — is considering a new lockdown as COVID cases spike by 74%. And in France, per the French minister of health, “Every 12 minutes night and day, a Parisian is admitted to an intensive care bed.”
At the same time, administration of the AstraZeneca vaccine — which the EU wagered heavily on, largely due to its lower cost versus the Pfizer and Moderna vaccines — was suspended in multiple EU countries for fear of blood clot side effects, either slowing the rollout or grinding it to a halt in some places.
Europe’s mishandling of the vaccine rollout started as a bungle, and it now threatens to become a catastrophe. To get things back on track, EU authorities are pondering extreme measures.
Ursula von der Leyen, the head of the European Commission, believes the EU must consider “emergency controls on vaccine production and distribution,” per the Financial Times. “We are in the crisis of the century,” von der Leyen said, adding that “I am not ruling out anything for now.”
The EU is planning an emergency vaccine summit next week, in which the heads of state or government for all 27 EU members will meet. Depending on what gets decided, it is possible the EU may restrict vaccine exports, or even force vaccine production facilities on local soil to tear up their existing contracts.
If moves like these are made, they would be jarring violations of free-market principle and international trade law, justified on the basis of a war footing — comparable to how factories were commandeered for state-mandated production during World War II.
Europe’s vaccine problems began with an overly bureaucratic negotiation process, a short-sighted overreliance on the AstraZeneca vaccine for the sake of lower costs, and a pile-up of production and distribution delays.
All of those issues were then intensified by blood clot fears relating to the AstraZeneca vaccine. At least 16 EU member nations — including France, Germany, Italy, Spain, and Sweden — chose to slow or suspend the AstraZeneca rollout based on 30 cases of blood disorders out of 5 million recipients of the AstraZeneca vaccine.
The head of the European Medicines Agency (EMA) has said the EMA believes the AstraZeneca rollout should go forward, with the benefits outweighing the risks. Boris Johnson, the Prime Minister of the U.K., also publicly announced he would soon be taking an AstraZeneca vaccine himself, in a move to help restore public confidence in the vaccine.
And yet, even if the suspensions are completely lifted, the damage may have been done in terms of vaccine hesitancy and a public loss of faith in the AstraZeneca vaccine. In desperate straits as the third wave of COVID worsens, the EU is reportedly considering Russia’s Sputnik vaccine as an alternative.
The question before was how much Europe’s recovery would lag the U.S. recovery. The new question is whether Europe will experience a recovery at all — or slip into a new downturn or recession instead.
In the EU, the last round of mutually agreed pandemic relief was a hard-fought battle between the “frugal five” EU members — Germany, Austria, Denmark, the Netherlands, and Sweden — and the countries in dire need of fiscal help, like Italy and Spain.
Europe’s next round of fiscal stimulus (pandemic relief) could put an even larger strain on the budget. And yet, the “frugal five” EU members may not fight as hard against it this time, because they will need it, too.
Alternatively, if the austerity mindset wins out, and Europe tries to make it through a new COVID-related downturn with no help, EU economic output could shrink painfully.
If the austerity scenario happens, Italy and Spain will once again wonder aloud why they should stay in the EU in the first place, the logic being: “If you won’t help us in a real crisis, when will you help us at all?”
Either way, in our view, the differentials between the United States and Europe already favored the dollar relative to the euro. Now, as Europe’s COVID teeters on the edge of catastrophe, those same dynamics dramatically favor the dollar.
In our view, the EU will likely be forced to issue hundreds of billions of euros’ worth of new fiscal relief to battle economic COVID fallout — or alternatively face centrifugal political forces (cries of anger from Italy and Spain) that threaten to tear the EU apart.
Either scenario, juxtaposed against a vigorous U.S. recovery and world-beating vaccine rollout, points to a far lower exchange rate for EUR/USD.