Recession on its way: does The Hague provide enough support?

RTL Z

The Netherlands can prepare itself for economically difficult times. The government has announced all kinds of support measures. Quite a package even, but there is also criticism. Why all those measures for businesses and not for the self-employed?

Miscalculated optimism

Earlier this month, the government showed optimism. Even if the virus would hit Europe, economic growth for 2020 would still amount to 0.9 percent. In this scenario however, the mathematicians did not take into account that the virus would most likely reach the Netherlands as well. Today, only a few weeks later, the hospitality industry is closed, people are asked to stay at home, many self-employed workers have no work and events are cancelled. And just like in other European countries, the economy may continue its lock down.

No room for stimulus

The Netherlands will most likely have to prepare for a recession. The question is now how severe this recession will get. At the moment, we are dealing with a supply problem: in many sectors, there is nothing for sale. No dinner at a restaurant, no sports classes at the fitness club and no weed at the coffee shop. Governments do not have to ability to stimulate supply: after all, they themselves ruled that these businesses had to close. Stimulating demand therefore makes little sense. Consumers may want to go out for dinner or go to sports classes, but they simply can’t, everything is closed.

Liquidity problems

‘What it comes down to is that the supply in the economy has to return’, says Bas Jacobs, Sijbren Cnossen Professor of Public Economics at Erasmus School of Economics. ‘And the sooner the disease is under control, the sooner the economy can recover.’ In the meantime, it is up to the governments and central banks to make sure that companies do not collapse. ‘When nothing is being made, but companies do incur costs, companies will experience liquidity problems’, Jacobs explains. In other words: there is too little money to meet financial obligations in the short term. ‘In a perfectly functioning market, healthy companies can get a loan from the bank. The question is if this remains the same given current circumstances. If financial prospects of companies are deteriorating, they normally have less chance of getting a loan.’

Entrepreneurial risk

The government and the European Central Bank have therefore announced several measures to maintain liquidity. For example, the government guarantees a larger percentage of SME loans. There is a reduction in working hours in order to partially cover the wage costs of employers. Furthermore, banks can borrow cheaply in order to provide loans to SMEs. Still, there are a few comments to make here. There are a lot of support measures for SMEs, but there is hardly anything in place for self-employed workers.

According to the Dutch Minister of Economic Affairs Eric Wiebes, self-employed workers made the decision themselves not to go into regular employment. In other words: it is a part of the entrepreneurial risk they take. Jacobs does not agree with this statement. ‘Wiebes’ statement was not very smart. If the government tells us that people are not allowed to work anymore, can we consider this a business risk? I have my doubts. Why provide all these packages for companies and not for entrepreneurs? These are exceptional macro-economic circumstances. In my opinion, the government should think of some kind of unemployment benefit for the self-employed.’

Weak fundaments

It will also be interesting to see what happens in the banking industry. The European banking system is not very strong, especially not in Southern Europe, Jacobs explains. ‘Since the crisis, banks have been extremely cautious with giving out loans, and they really need to be persuaded to continue lending. Businesses are extremely dependent on debt financing. Without it, things can go wrong. It is of great social importance that credit allowances keep increasing.’

Professor
Faculty
Erasmus School of Economics
More information

The full article of RTL Z, 16 March 2020, can be found here (in Dutch).