Cover Photo: Speech by President Emmanuel Macron on the new economic reforms, March 25, 2020, in Mulhouse, France, on YouTube.
In your opinion, what will be the economic backlash of this recession on France and Europe?
I would like to draw attention to what is missed by a lot of commentary about the effects of the virus and the combat against it. One is going to be the foregone demand that will hit airlines, the tourism industry, transport, etc. We know the current recession is going to be severe, and induce mass unemployment and strong GDP declines. However, another closely related and very important problem is individual firm liquidity and the preservation of the economic networks.
Each normally healthy firm is a precious part of an economic tissue that if gone induces large losses on other parts of the economy, workers and their families, local communities and the state as a whole. The scale of this crisis in the real economy – even if short-lived – will work largely through production and sales networks. Forced stoppages – because of shutdown, lower worker productivity, lack of supplies -- make it at the end difficult to make different payments: wages to employees, to pay suppliers, rent or taxes.
Banks may be unwilling to provide working capital to firms even if monetary authorities pump massive liquidity to the banking system.
Each firm regularly uses trade credit, either granting it or receiving it. If firms are unable to meet their obligations because their accounts receivable will not be paid, we risk that many firms will go bankrupt. Banks may be unwilling to provide working capital to firms even if monetary authorities pump massive liquidity to the banking system.
How helpful are the EU and French policies?
Fiscal policy – for example allowed by lifting temporarily the European stability pact to which many countries, including Germany, seem to agree -- is a blunt instrument even though it helps somewhat – especially in sustaining demand. The EU as such has a small joint budget and limited action possibility by itself. What blurs the picture is that different firms are going to be hit in a heterogeneous manner, and aiding them individually will be difficult. Help as of yet suggested by France goes to the heart of the problem.
Help suggested by France goes to the heart of the problem.
A deferral of taxes (enhancing firm liquidity), rent or energy bills and paying temporarily furloughed workers to allow them survive through a difficult period and sustain global demand is an important thing. There is some unconditional aid dedicated to small firms (with less than 10 employees). Moreover, for all, but especially for struggling firms, the government is ready to guarantee with banks at least yearly loans of up to 3 months of their revenues with low interest rates and allowing up to 5 years of repayment.
This may be a very powerful and successful policy: it will allow firms to untangle the spaghetti web of different accounts payable and avoid cascades of bankruptcies. It will help preserving current production networks, and as a result an even deeper recession. If the lifeline works, very few guarantees will need to be honored, and the measure will not cost much to the taxpayer. The question is whether the amount of working capital tied up for some e.g. heavily exporting and importing firms where payment delays are often up to 180 days will not be greater than the threshold suggested by the government.
Listen to Tomasz Michalski on the HEC Paris podcast:
? How the #coronavirus pandemic is attacking individual firm liquidity and what governments can do to help. By #HECprof @TomKMichalski ? https://t.co/68Dm3N5Gfr #Covid19 #COVID19france pic.twitter.com/mYSsF0Piiy— HEC Paris Business School (@HECParis) March 24, 2020
Learn more in this free webinar from May 5, with professor Tomasz Michalski on the recession is different from past (and more specifically on how the current supply and demand shock affects the French and global economy; why standard responses (monetary and fiscal policy) may be inadequate and new uncharted measures are needed; and what may be the policy aftermath). This webinar is a part of a series organized by HEC Paris Executive Education: