Europe’s Grand Social Welfare Experiment Can Still Go Horribly Wrong
Europe’s Expensive Jobs Rescue Reaches Moment of Truth
(Bloomberg) --
European governments that unflinchingly deployed tens of billions to prevent a catastrophic jobs crisis are now grappling with the challenge of turning off the tap on what’s become one of the biggest welfare experiments in history.
Unlike the U.S., which allowed workers to take the strain, European countries took unprecedented steps as they shuttered economies to contain the coronavirus, with many directly taking on the cost of paying employees to prevent mass layoffs. The next crucial step is managing the financial cost versus the economic and political threats of leaving people and companies in the lurch.
Many of the programs were crafted on the fly with little clarity on how they’d be ended. U.K., Chancellor of the Exchequer Rishi Sunak is looking at options including reducing the subsidy, and allowing people to work while receiving a smaller government payment. French officials are also discussing a gradual wind-down.
The massive efforts so far have saved about 40 million jobs across Europe at an eye-watering cost that governments can’t afford indefinitely. But removing aid before companies can afford to pay wages again could plunge millions into lasting unemployment, derailing any nascent economic recovery as well as raising the risk of social and political unrest.
“It’s quite amazing, the numbers are something we have never seen before,” said Stefano Scarpetta, director for employment, labor and social affairs at the OECD in Paris. “My sense is that they will keep it for quite some time. The cost will be enormous but the alternative is to see a lot of firms going bust and therefore a lot of unemployment.”
In France, more than half the private sector workforce is effectively being paid by the state to stay at home, while Germany has seen a surge in the number of companies using its Kurzarbeit wage subsidy program in this crisis.
“State wage support is our strongest and most powerful bridge across a deep economic trough,” German Labor Minister Hubertus Heil said Monday.
The question is how to target or taper these massive programs as administrations begin to plot their way out of the lockdowns needed to control the spread of the pandemic.
While some businesses can reopen, social distancing and other restrictions mean many won’t be at full capacity and won’t need all employees back. Laying off workers permanently will be problematic in countries where the basic safety net for workers is weaker in normal times.
A measure of labor market vulnerability by Oxford Economics shows Greece, Spain and Italy are particularly exposed. Spain is a concern because of its high number of temporary contracts.
In the U.K., Sunak said there’ll be no “cliff edge” when support is scheduled to finish at the end of June. He still warned it’s not sustainable to continue indefinitely. With the government paying 80% of the wages of more than 6 million employees, the cost is currently expected to be 39 billion pounds ($48 billion).
In France, which has planned at least 24 billion euros ($26 billion) of spending on furlough, the government is working on how to adapt its measures from June 1 so that the maximum number of people return to work. Finance Minister Bruno Le Maire has warned this second phase will be the “most difficult time.”
The issue may be easier for countries with long-term programs and stronger fiscal positions.
Germany has one of Europe’s lowest debt ratios, and its Kurzarbeit is tried and tested over many years. In the past month, half of all German businesses have used the program, according to the Ifo economic institute. Chancellor Angela Merkel’s coalition plans to extend it until at least the end of 2020 and even raise the wage subsidy.
But no matter what the program, there’s a limit to what they can do, and some workers will eventually lose their jobs. Airlines across Europe have already announced huge cuts to deal with what’s likely to be a long-term shift in the industry. The European Commission on Wednesday forecast that euro-area unemployment will rise to 9.6% this year from 7.5% in 2019.
“It’s highly likely that some workers on these schemes will end up losing their jobs, especially in the most vulnerable countries or the hardest-hit sectors,” said Daniela Ordonez and Rosie Colthorpe at Oxford Economics. “We will still see the eurozone unemployment rate rising very sharply.”
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