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Covid-19: economic recession and government policies

La crise Covid-19. « Éviter la politique du plus petit des grands pas »
Publié le
18 Juin 2020

During the Covid-19 crisis, the government quickly implemented measures to reduce the short-term economic consequences for companies. But what will be the long-term, systemic consequences of this unprecedented “lockdown” both in France and abroad?

Interview with Grégory Vanel, assistant professor at Grenoble Ecole de Management, doctor of international economics and Ph.D. in political science.

Partial government support for unemployment, the reduction or elimination of social security contributions, payouts for SMEs… What is your point of view on the emergency measures implemented in France, which are some of the strongest in the world?

A key figure: On May 11, 2020, 12.4 million employees were impacted by reduced business activity. That's more than half of all employees in the French private sector. This highlights the importance of the challenge and the consequences, which have been highly underestimated.

These measures were first designed to compensate for slowed economic activity. The goal was to ensure the survival of companies and the jobs they provide in order to guarantee a quick reboot of economic activity and consumption after the lockdown.

Are these wide-spread, but temporary, measures designed to offset, or avoid, a future large-scale economic recession?

No, this unprecedented crisis is characterized by its violence and rapidity. The medium-term impact is expected to be similar to the Great Depression of the 30s. To illustrate this, consider the fact that French industrial production dropped four times faster than during the subprime crisis. In March, 453,000 jobs were lost despite emergency measures. This means that a return to initial production capacities in France will require at least 2.5 years (if you consider total job loss and loss of productivity).

In sum, these measures artificially supported a company's solvency as well as employee spending power despite a radical drop in activity. But one month of lockdown equals a 33% loss in productivity. So much more will be needed than what has been done so far.

For the first trimester of 2020, France reported a 5.8% loss in GDP (INSEE April 30). This is worse than in Germany or the US. For 2020, the French government expects a loss of 8%. Why is France in this particular situation?

The loss of GDP estimated by INSEE is based on the hypothesis that activity will reboot after the lockdown exactly as it was before the crisis. This would require a 30% jump in activity, which is by definition, impossible. Why is GDP loss expected to be worse in France (around 10% for 2020)?
This crisis is unique in how it impacts industry and services. Only 12% of French GDP is based on industrial activity. And there has been a succession of three major effects:

  • The closure of borders and frozen activities in China disorganized industrial activities and logistics chains around the world, highlighting the issue of dependence on China.
  • The lockdown greatly impacted sales and services activities, which operated at 50% of normal until April.
  • The progressive end of the lockdown with its associated hygiene measures for prevention will have a long-term impact on service activities, creating lower demand and higher prices. In addition, numerous hotels, restaurants and tourism-related companies have closed definitively… Finally, there has been a major impact on the aeronautics and automobile industries.

Overall, the drop in activity combined with low industrial activity will create an overall impact on value chains, thus creating a double-digit recession. With all activities having been halted, the crisis will be deep and long. Already, we are facing a wave of layoffs by small industrial and service companies. Current estimates predict 900,000 jobs will be cut in 2020 in France. That's gigantic!

Bruno Le Maire, the French Minister of the Economy, has responded with suggestions concerning a possible lengthening of the workday as well as a focus on innovation in order to create a more competitive and carbon-free economy. What do you think?

We have to avoid a policy of taking the smallest of available big steps. Otherwise we risk entering the Great Lockdown Crisis! Why?

The average workday in France is 38.4 hours per week (higher than in Germany), and not the famous 35 hours, which mostly influences employee salaries. In addition, the French job market is highly flexible with 80% of new contracts being short-term ones, half of which are less than a month long. If the government increases the average workday, it will certainly increase activity for companies whose order backlog is full, but it won't create new jobs. It's the opposite of the stated goal…

We should underline the fact that questioning the 35 hour agreement is a request by just a small part of business leaders who are at the head of the largest companies. Given the characteristics of this crisis, it will already be easier on major companies and hard on smaller ones. It will impact workers more than it does managers. If this is the message we send to the French population, they will increase their savings instead of their spending, and therefore lower demand, especially for service companies. Questioning the 35 hours agreement is a false good idea!

Amongst the many possible solutions, relocating industrial activities and investing in energy efficiency are valuable possibilities. If the overall logic is to protect jobs, these relocations must include creating jobs dedicated to digital and energy transformations. There has to be a strong industrial policy at regional levels. Two-thirds of public funding is already done by regional authorities, who can therefore be excellent actors in this process.

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