Since the start of March, the French government has put in place an array of measures designed to prop up the economy. Effective so far, these steps have been necessary to keep companies solvent during the Covid-19 crisis. Three months in, these companies need to get back to work and begin preparing for the post-coronavirus landscape.
People lining the sidewalks outside Burger King, lengthy queues outside Decathalon, hairdressers booked up until summer… the easing of the lockdown in France mid-May provided some much-needed relief for companies big and small that had seen business slow to a trickle this spring. But let’s not go overboard - the long-term future of the economy is far from secure.
While it will take more than a summer of spending to reverse the damage done to the French economy by Covid-19, the government has pulled out all the stops in an effort to ensure that a deep recession does not set in. Mass redundancies and bankruptcies have been avoided, but it seems clear that the French are in this for the long haul. What are the means at the government’s disposal? Read on to find out.
The first measure taken by the finance ministry to support businesses was a three-month freeze on taxes and other charges. The sectors hardest hit by the pandemic were even allowed to cancel outstanding bills, which opened the floodgates to claims from other sectors of the economy. Economists agree that the measures have been effective. Now the question is, will they need to be extended? And as with all aspects of government stimulus, the timeframe issue is crucial.
The fact that we don’t know when the healthcare crisis will truly end, by extension, means that we can only hazard a guess as to when normal consumer behavior will resume.
According to Céline Soulas, professor of economics at the Burgundy School of Business, “We need to give companies more time to rebuild their production capacity and readjust to the fall in consumer demand.” The fact that we don’t know when the healthcare crisis will truly end, by extension, means that we can only hazard a guess as to when normal consumer behavior will resume. This threatens to hamstring the economic recovery. “In the back of their minds, CEOs know the financial safety net is temporary and they will have to pay the piper at some point. When that day arrives, they will no longer be shielded from economic reality. On can easily imagine corporation tax being cancelled altogether to soften the blow,” adds Soulas.
From a fiscal point of view, the government has some other tools at its disposal. “The reduction in corporation tax, initially set for 2020, before being postponed because of the Gilets Jaunes crisis, may now take place this year after all,” predicts Alain Durré, chief economist at Goldman Sachs France. His team posits a direct stimulus on behalf of the government of the order of €20 billion over the coming year, in the form of reduced taxes and increased investment.
The question of what tax a company should be eligible to pay in these extraordinary times has been the subject of heated debate because, while a reduction in the rate is viewed as essential, it is an inescapable fact that this will result in less money in the government coffers. “We may well ask ourselves if it wouldn’t be better to put in place a series of other measures designed to help companies through this emergency and keep the current level of corporation tax, because if the state loses this source of income it could be tempted to create additional household taxes to make up the shortfall,” she continued.
Employment & consumption
In order to limit the damage to the economy, the government set up a furloughing scheme. “During the great recession of 2008-2009, Germany introduced furloughing and its unemployment rate only went up by 0.2%,” notes Alain Durré. In France, a country where the jobless rate was already relatively high, unemployment rose by 1.6% in the aftermath of the crash.
For the moment, there has not been a massive spike in the number of people out of work in France because of the pandemic, even if the rate of underemployment has increased. “Given the wriggle room it gives companies, it is difficult to argue against furloughing as a strategy,” adds the Goldman Sachs economist.
In the US, where it is much easier to hire and fire people than it is in France, the unemployment rate shot up to 14.7% in April, as against 3.5% in February. There now risks being a much sharper contraction in consumer spending across the Atlantic than in France. To mitigate against this, the Trump administration has distributed a one-off cheque of $1,200 to each adult in the US making less than $75,000 a year. This so-called ‘helicopter money’ is aimed at helping local businesses by stimulating spending on main street.
There will be no resumption of normal consumer spending without a return of consumer confidence. According to the NGO Positive Money Europe, if each adult in the EU was given a cheque for €1,000, it would result in an immediate GDP jump of 1.2%. But it is not quite as cut and dried as this, since it assumes that consumers will not bank the money for a rainy day, and that is a big assumption, given the fact that the French save more than the EU average anyway, and have saved more heavily since the debut of this crisis. In March, bank deposits reached €20 billion, almost three times the amount in February.
What’s more, when the French go into saving mode, what they do end us spending money on is small ticket items, which have a limited impact on companies requiring immediate cash injections to survive. “At this time, many households have no other choice but to go for the low-cost option, and unfortunately, that rarely means buying French. The lack of people shopping local in the aftermath of the coronavirus could well hamper economic recovery,” adds Soulas.
State-guaranteed loans have also been part of the French finance ministry’s Covid-19 game-plan. By the middle of May, 500,000 requests totaling a trillion euros were registered, with two-thirds signed off on by the authorities. Added to this is the €20 billion in payments postponed for six months concerning 1.6 million outstanding debts. This measure has proved prudent in maintaining the cashflow of companies and shoring up their investments. But here, again, the question of timespan raises its head. This is no time for the authorities to be calling in their debts. “All these measures have been crucial, but cannot be put on the never-never. They will have to be paid for one way or another in 2021. It is not a situation that will easily be resolved. It will take at least a year for the dust to settle,” stresses Soulas.
The lack of clarity surrounding how much of this government largesse French companies will eventually have to foot the bill for, has largely put the kibosh on French firms making new investments – a trend which will have a damaging effect in the long term if it is allowed to continue for a prolonged period. This should give pause to those predicting a swift bounce back for the economy in 2021. According to a survey of SME bosses carried out by Bpifrance and Rexecode, 81% had investment plans coming into 2020. Among those, just 31% are going ahead with 22% cancelled outright and the rest postponed indefinitely.
State-guaranteed loans have been part of the French finance ministry’s Covid-19 game-plan. By the middle of May, 500,000 requests totaling a trillion euros were registered, with two-thirds signed off on by the authorities
It would be a dereliction of duty, therefore, if the authorities did nothing to promote investment at this time. “While all countries in the Eurozone are piling up debt to support their economies, they shouldn’t sacrifice investment. It is crucial that the investment issue is addressed at European level,” states Durré.
There are several possible solutions to the investment dilemma, but the scale of this crisis means that a coordinated approach is essential. And it would be short-sighted just to focus on strategic sectors of the economy and leave less immediately vital parts of the economy, such as innovation and sustainable development, to stagnate, especially as it is these from these sectors that solutions for the post-coronavirus world may be found.
These investments will take time to bear fruit. But they are crucial to the success of the economic relaunch, and not just for companies. Because, to ensure companies have room to maneuver, the state must foot the bill. The EU has loosened the purse-strings, how feasible its budgetary policy is remains to be seen.