"The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime," European Central Bank President Christine Lagarde said Thursday, warning that the gross domestic product of the countries that share the euro currency could collapse by 12 percent this year.
France's economy contracted by 5.8 percent in the first quarter, the largest decline since record keeping began in 1949, the national statistics office said. Spain shrank by a historic 5.2 percent, far surpassing the previous record of 2.6 percent in 2009. And Italy — the European country hit hardest by the pandemic — shrank by 4.7 percent as it entered a recession.
But the jobs numbers were more promising. The unemployment rate in Europe crept up only modestly in the first weeks of the coronavirus lockdowns — at a time when millions of Americans filed for jobless benefits.
The contrast shows the effect of Europe’s starkly different approach to fighting the economy-busting effects of the pandemic, with many governments intervening to subsidize private-sector salaries.
Most of the jobs data European countries released Thursday was for March, meaning it represents about two to three weeks of the shutdown, but not the full scale of an economic cataclysm that has escalated since then. The seasonally adjusted unemployment rate across the European Union rose by 0.1 percentage point in March, to 6.6 percent, according to the E.U. statistics agency.
Compared with the U.S. jobs carnage for the same time period, when jobless claims spiked to record levels, the European situation appears far more contained. The U.S. unemployment rate increased from 3.5 percent in February, before the pandemic hit, to 4.4 percent in March. Analysts estimate that the current U.S. jobless rate, which will be released May 8, is 10 to 15 percent.
The philosophy in Europe is that the financial blow of the pandemic can be softened if workers are able to keep paying their bills and if businesses do not have to hire and train an entirely new set of employees as the crisis abates. Many European governments have implemented a subsidy program, pioneered by Germany in the last global recession, under which they pay up to 87 percent of salaries for workers sent home but kept on payroll.
In the United States, stimulus and relief programs have been comparable in scale, but not as directly linked to avoiding layoffs. The impact of the pandemic in terms of lost work hours is similar on both side of the Atlantic, said Holger Schmieding, chief economist for the Hamburg-based Berenberg Bank. But the European system saves “a lot of anguish in hiring and firing.”
“If you have 10 percent of the workforce getting laid off and going on unemployment benefits, then you would have 10 percent of the current high-spending consumers who wouldn’t be spending anything because of the insecurity of the future,” said Danish Employment Minister Peter Hummelgaard. His government’s program pays 75 percent of workers’ salaries, up to $3,355 a month, for businesses that have taken a significant hit from the lockdown. Employers cover the other quarter.
In Denmark, the unemployment rate rose to 4.2 percent in March, up from 4 percent in February, according to numbers released Thursday. If the 150,000 workers enrolled in Denmark’s salary subsidy program had instead joined the jobless rolls, the unemployment rate would have jumped to about 9.5 percent.
“Businesses are encouraged and obliged to keep workers in their current jobs, for the sake of the individual worker, obviously, but also for the overall sake of the economy and our ability to get back on track fast,” Hummelgaard said. And as Denmark starts to reopen its society, he said, policymakers are already looking at more traditional stimulus programs and hope to wind down the subsidy program by early July.
Salary subsidy programs have quickly expanded to cover major portions of the workforce in Europe’s largest economies. Nearly half of French workers are enrolled; in Britain, two-thirds of employers are participating. The German federal employment agency announced Thursday that employers enrolled up to 10.1 million workers in its wage subsidy program between mid-March and April 26, more than triple the total for all of 2009.
How much these programs will end up costing is difficult to estimate, because most governments have made them open to any eligible company rather than limiting them to a certain level of funding, and the economic outlook continues to darken.
The official British Office for Budget Responsibility estimated this month that Britain’s program, which is subsidizing up to 80 percent of the salaries of eligible workers, would cost about $65 billion over three months — a share of the British economy equivalent to a program that would cost $508 billion in the United States. The British program has since been extended by a month, until the end of June. Employers are clamoring for it to stretch until the fall, warning that if it is cut off prematurely, widespread layoffs will simply have been delayed, not avoided.
In many European countries, unemployment benefits are also quite high — sometimes 60 to 70 percent of the worker’s previous salary for the first year — so the furlough programs involve a marginal, though significant, cost increase.
The U.S. small-business loan initiative known as the Paycheck Protection Program contains elements similar to the European efforts, because it forgives loans if they are used for payroll, rent or mortgage payments. Congress has channeled $659 billion toward it so far. But the money does not go exclusively toward avoiding layoffs, and U.S. unemployment filings continued to skyrocket Thursday, bringing total new claims to 30 million in the past six weeks.
Europeans say their programs make a major difference in the way they plan their lives.
“It’s definitely keeping our jobs alive for the moment,” said Maria Hoejer Romme, a Danish business researcher whose company enrolled in the program last month.
She and her husband have a 10-month-old and just bought a home, making them vulnerable to sudden economic disruptions, she said. They recently had a conversation about what would happen if she were laid off, something she said she never could have imagined just a few months ago. The salary subsidy program has made her company more resilient and helped her family plan for the strange new pandemic-struck world.
“There might be a chance I’d lose my job, but now I can think, ‘Okay, it probably won’t happen,’ ” she said. “You can adjust your economy, and you can look into the future.”
Unemployment is still rising across Europe, despite the programs — just at a slower pace than in the United States. German unemployment in April rose 0.7 percentage points to 5.8 percent, according to national data released Thursday, and is forecast to rise further. In France, the number of people filing for unemployment benefits in March jumped by 7.1 percent compared to the previous month, more than three times the previous record established in 2009.
“The corona pandemic is likely to lead to the worst postwar recession in Germany. As a result, the job market is also under considerable pressure,” Detlef Scheele, head of the German Federal Employment Agency, told reporters Thursday. German policymakers agreed last week to increase the salary subsidies so that they cover up to 87 percent of a worker’s pay, up from 67 percent previously.
Economists say wage subsidy programs are most effective if an economic crisis is relatively short — just a few months, ideally — because it is harder for companies to recover if they are frozen much longer than that. Customers will move on; demand will change. Assuming lockdowns can be eased relatively quickly, the programs may prove successful, but if the health situation forces economies to hibernate longer, the outcome may be less rosy.
Certain businesses, such as in the travel industry, may have to lay off employees no matter what, because demand is unlikely to recover to pre-pandemic levels anytime soon. Subsidies spent on their employees may not be especially economically effective in the long run, although proponents of the programs say there can still be an advantage in sparing workers from sudden employment shocks.
British Airways, which enrolled in Britain’s wage support program, said this week that it probably would need to lay off more than a quarter of its employees, or about 12,000 people. Scandinavian Airlines has also announced plans for large-scale cuts.
“If we see a longer economic downturn in Europe, we’ll see the same problems as the U.S. They will have just delayed it,” said Simon Tilford, director of research at Forum New Economy, a Berlin-based economics think tank. “It’s not a long-term solution to a sharp reduction in demand for labor, because the state cannot afford to subsidize wages at that level indefinitely, and it would slow the pace of adjustment.”
In the past, proponents of the U.S. system, with its quick-to-fire, quick-to-hire employment structure, have argued that the approach helps the economy adjust to shocks more nimbly. Although those arguments are still being made, U.S. policymakers have been moving toward the European approach, by increasing unemployment benefits, which in the United States also extend to furloughed workers, and paying employers to avoid layoffs in the first place.
But much of the damage may have been done already in the United States. Layoffs are hard to undo, and Europe was able to move quickly because many countries already had similar programs on the books in more limited form.
In the short run, many European employers view the wage subsidy programs as a godsend.
“Small businesses have no extra money to cover a crisis situation,” said Paul Konradi, 33, general manager of Rowdy, a chain of four hip barbershops in Berlin and Hamburg. Customers used to come for haircuts, hot towels and beard trims in establishments decked out with exposed brickwork and vintage chrome and leather chairs. Now those clients are gone.
Without Germany’s subsidy program, Konradi said, he probably would have been forced to start laying off some of the company’s 26 employees. “There would be no money” without the program, he said. “I don’t know what I’d do.”
The programs are “effective, but it’s not absolute,” said Jean Pisani-Ferry, a French economist and nonresident fellow at the Peterson Institute for International Economics who has taken part in crisis consultations with the French government.
Still, as a gamble in risky times, he said the programs make sense.
“You have two risks. You have the risk of keeping companies afloat that have no future” by using wage subsidy programs. Or, without the programs, “you have the risk of precipitating the collapse of companies that do have a future,” he said.
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