Paul Taylor, a contributing editor at POLITICO, writes the Europe At Large column.
PARIS — Across Europe, finance ministries are pressing to phase out the furlough schemes that have kept workers idled by the coronavirus pandemic in their jobs for the past eight months.
Given the huge cost in extra public debt, the bean-counters argue, governments cannot afford to go on replacing household incomes much longer. The economy must be allowed to start to adjust.
This would be a terrible mistake. Withdrawing support prematurely would be socially and politically disastrous. It would cast millions of Europeans into long-term unemployment just as the rate of coronavirus infections is picking up again, with no imminent sign of a widely available vaccine or cure. Such a move would handicap any economic recovery and cause a damaging loss of skills and permanent high unemployment.
Critics say the furlough schemes are costly, indiscriminate and open to abuse by employers. One conservative lawmaker in Chancellor Angela Merkel’s Christian Democratic Union party complained that hundreds of thousands of employees were enjoying “a year’s sabbatical on the public tab.”
Moreover, the critics add, the longer the crisis lasts, the more governments are subsidizing zombie jobs that will never return in businesses that need to automate, downsize or fold. Instead, states should be pushing workers to retrain and look for jobs in sectors likely to thrive in the post-pandemic economy.
A survey of German economists by the ifo Institute for Economic Research and the conservative Frankfurter Allgemeine Zeitung found that two-thirds of respondents were concerned by a growth in the number of “zombie firms;” half blamed Kurzarbeit (short-time work) payments for keeping insolvent companies afloat.
“Some state aid measures unfortunately have side effects,” said Niklas Potrafke, the head of ifo’s Center for Public Finances and Political Economy. “They favor keeping businesses that don’t have a convincing business model artificially alive.”
What these critics fail to acknowledge, however, is that this crisis is due not to the normal business cycle but to a sudden massive global public health emergency.
No one knows when the coronavirus will be tamed or how much more economic damage will be wrought by further lockdowns before it is.
With the boom in Zoom videoconferencing, will business air travel ever return to pre-COVID levels? Will there be a prolonged decline in tourism or just a blip? Will pandemic-induced online shopping make malls and high-street stores redundant? Will fossil fuel car sales ever recover? These unknowns affect the future of millions of jobs in the aerospace, airline, tourism, retail and automobile sectors.
As we start trying to answer these questions, the crucial one remains: when and how to start withdrawing the stimulus.
History urges caution. Cutting back fiscal spending and tightening monetary policy too soon choked off the United States’ recovery from the Great Depression and sent the country back into recession in 1937. A similar misguided policy mix after the global financial crisis precipitated a double-dip recession in the eurozone in 2011-2012, prolonging suffering and fueling nationalist populism.
Far better, then, to keep supporting workers’ livelihoods, especially since inflation is off the horizon for the foreseeable future and eurozone governments can borrow at near-zero interest rates because the European Central Bank is hoovering up their bonds.
“We are perfectly capable of any deficits and borrowing for the next couple of years,” said Nick Crafts, professor of economic history at Sussex University. “In the next 12 months, the continuing need is to provide welfare state social insurance. That’s what we learned from the 1930s. The market can’t do it.”
As the European Central Bank’s Christine Lagarde said in an interview earlier this week, it is “essential” that “the budget safety nets put in place by governments during this crisis should not be withdrawn prematurely.”
Fortunately, for now, governments appear to be listening.
A rapid rise in coronavirus cases in the U.K. forced Chancellor of the Exchequer Rishi Sunak earlier this month to row back on plans to end a program covering up to 80 percent of the incomes of British employees. Instead, the measure was extended for six months but scaled back to pay only two-thirds of the wages of employees in pubs, restaurants and other businesses in areas affected by local lockdowns.
France and Italy have extended furlough schemes they were planning to phase out due to the resurgent virus. Germany has expanded its longstanding Kurzarbeit system, and has suspended a requirement for firms to contribute part of the cost.
None of this means, of course, that job retention schemes should be left unchanged. And indeed, there’s already a great deal of good thinking about what needs to be done.
While warning against a cliff-edge withdrawal of furlough schemes, economists argue that they must be made more selective and tapered, with businesses gradually contributing more to retain staff on their payrolls, while taxpayer money is targeted toward investment in tomorrow’s green and digital economy.
Experts at the Organization for Economic Cooperation and Development (OSCE) recommend making firms share the cost of hours not worked, to give greater assurance that subsidies protect viable jobs. Government support should be time-bound, but the limits should not be set in stone given the uncertain course of the pandemic.
Short-time work payments and typically lower unemployment benefits should be more closely aligned to strengthen incentives for workers to resume normal hours or seek another job. The state should step up support for job search and career guidance to facilitate mobility of labor, and promote training while workers are on reduced hours.
In a paper for the Peterson Institute for International Economics, Jean Pisani-Ferry, Olivier Blanchard and Thomas Philippon suggest that job retention schemes should be replaced in the recovery phase by wage subsidies in sectors such as restaurants where social distancing rules temporarily reduce productivity and turnover.
As for the “zombie jobs” objection, intriguing research by Bank of Finland economists suggests that many of the so-called zombie firms that received government subsidies during the financial crisis were not as dead as they looked. Two-thirds recovered to become healthy firms.
In any case, better to risk a few zombies than a graveyard for millions of jobs.