The billions of euros the government is spending is not going to save our economy
On 6 April 2020, Bas Jacobs, Sijbren Cnossen Professor of Public Economics at Erasmus School of Economics and Sandra Phlippen, Assistant Professor at Erasmus School of Economics and Chief Economist at ABN AMRO, were guests at Dutch radio station BNR Nieuwsradio. They discussed the current support measures the government introduced and possible measures the government should consider to limit economic damage.
The NOW (Temporary Emergency Measure Bridging Employment) was instituted by the government to prevent workers from losing their jobs and income as a result of the corona crisis. Employers who experience structural loss of turnover and meet the requirements can receive an allowance for their wage costs. This measure seems to be very popular among employers, but Phlippen noticed that there is still some resistance among entrepreneurs regarding the other measures that have been put in place in recent weeks. She specifically refers to the emergency credit measure, which has only received little requests since its introduction.
Entrepreneurs seem to be trying to solve their financial problems by firing staff and negotiating rent reductions. But according to Phlippen, this does not solve the problem, it only postpones it. Furthermore, businesses are creating an enormously high unemployment rate by doing so. This only harms the economy due to decreased consumption in the long term. ‘It is very important that entrepreneurs ask the government for support to prevent high unemployment rates in the future.’
Jacobs believes that the billions of euros the government is spending is not going to save our economy. ‘There are more and more institutions that realize that the crisis may even be bigger than the financial crisis in 2008. Unemployment rates in the United States are much higher than we initially thought possible. The economy is deteriorating very fast and the current measures, which are mainly based on short term survival, are not going to keep the economy going in the long term.’
Jacobs believes that the solution to the seemingly hopeless situation lies in the increase of coronavirus testing. ‘Not only to prevent people from becoming ill and avoid long-term health damage, but also to ensure that a part of our normal daily life can be picked up again as soon as possible. We really need to start testing a lot of people at a high pace'. According to Jacobs, anyone who tests negative should be able to go back to work with a so-called corona-ID. Of course, this is not without risks since testing never provides a hundred percent reliable result. ‘We need to think about the conditions under which the economy can reopen and the limited testing capacity seems to be the biggest obstacle.’
Another solution to the current situation is the so-called one-and-a-half-metre economy: an economy in which social life can be picked up, but with the appropriate distance. This scenario cannot be ruled out according to Jacobs. ‘People have a strong need for social activities such as going out to eat or being able to travel. I think there should be more discussion about how we can reopen the economy in a responsible way.’
According to Phlippen, the most sensible thing to do is to keep the lockdown fully in line with what the RIVM (National Institute for Public Health and the Environment) says. 'It is very important to keep the pressure on the curve, even when there's good news'. Phlippen mentions that research found that it is better for the economy to be very strict in the medium term than to reopen the economy as soon as possible, which might result in a revival of the spread of the virus.
Social benefits and costs
The discussion about how much a human life is worth is also becoming more and more heated. ‘If it costs 1 million euros to save someone or prevent permanent damage to their health, maybe 10 or 15 people will become unemployed. It is important to note that there is also a lot of emotional damage involved,' says Jacobs. ‘I believe the discussion should be about smarter ways to think about the social benefits and costs of interventions. I believe testing is a relatively inexpensive instrument which can achieve relatively good results.’
The economists also discuss possible interventions on a European level. Phlippen believes that in any case, the solution does not lie with the controversial Eurobonds. However, it is clear that something needs to be done to prevent Europe from falling apart. Phlippen explains that the impact of the crisis on European countries is asymmetrical. Not only because some countries have been hit harder than others, but also because the countries' economic positions differed before the crisis already. We have to prevent that the countries' recovery also becomes asymmetrical.
According to Phlippen, the best solution for this problem is in the form of a gift, in which the most unstable countries do not have to pay contribution to the European budget until 2027. According to Jacobs, this is not a bad idea. The moment you introduce a new instrument on a European level such as Eurobonds or Corona bonds, you will probably see that this instrument will be used again during the next crisis. This will in turn lead to discussion between Northern and Southern Europe. By introducing this gift, we can prevent that from happening.