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| DATE | 2021-02-17 |
| FROM | Ruben Safir
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| SUBJECT | Subject: [Hangout - NYLXS] Coming economic troubles ii
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wsj.com
Europe Froze Its Economy in Place. The Thaw Could Be Ugly.
Tom Fairless and Eric Sylvers
15-19 minutes
For nearly a year, large swaths of Europe’s economy have been in a deep
freeze.
In pursuing such policies, European leaders have bet that, once the
pandemic subsides, they can defrost the region’s $18 trillion economy,
allowing businesses to fire up quickly and bring back workers. It’s an
intentional effort to slow an economic deep clean, dubbed by many
economists creative destruction. This reflects a political choice:
Europeans are generally less tolerant of the brutal adjustments required
by the U.S. model of capitalism.
But as the pandemic drags on and Europe’s vaccine rollout is expected to
stretch through the year and beyond, some policy makers, economists and
business executives worry that mothballing the economy for so long will
leave it struggling to adapt to the seismic business and social changes
the crisis is driving. That could stall an economic recovery.
“Trying to freeze work where it was and how it was is in many cases a
profound mistake, because it delays the corporate reorganizations, new
investments and new hires that are necessary,” said Carlo Bonomi,
chairman of Confindustria, the Italian employers’ federation. While
Europe keeps the economy in suspended animation, the U.S. is already
creating new jobs and businesses.
The contrasting policy responses feed a question likely to be debated
for years: Which economic model better withstands the maelstrom
unleashed by the pandemic?
The U.S. approach “is more brutal but also more flexible,” said Nicholas
Bloom, an economist at Stanford University.
Like Europe, the U.S. has provided vast government support in the
pandemic, through payments to businesses and workers and credit from the
central bank to support struggling enterprises. The Federal Reserve
established facilities to buy high-grade corporate debt, support lending
to smaller businesses and enable the issuance of securities backed by
small-business, student and-credit card loans, among others. These
unprecedented programs helped to preserve jobs and keep alive distressed
but solvent companies.
But while governments on both sides of the Atlantic strove to put a
floor under the slump, the U.S. did less to stop workers and capital
from shifting toward new uses.
Europe‘s labor markets were less flexible than that of the U.S. before
the pandemic. Europe’s governments have adopted broad social safety nets
and job-protection laws, and its muscular trade unions generally won’t
tolerate large-scale layoffs. Those attitudes have hardened during the
pandemic, a special kind of shock that, unlike most recessions, isn’t
the result of excesses or distortions in financial markets or the
economy that need to be unwound.
The eurozone economy shrank more than twice as much as the U.S. last
year and will recover more slowly this year, according to the
International Monetary Fund, largely because European governments
adopted draconian social restrictions to contain the virus. The U.S.
jobless rate has boomeranged, first cratering close to 15% and then
improving sharply, while the eurozone’s headline unemployment has barely
budged during the crisis.
Europe registered far fewer business bankruptcies last year than in any
of the previous five, while 2020 bankruptcies in the U.S. remained
within the pre-pandemic range, according to data from the Bank for
International Settlements. Applications to start new businesses in the
U.S. rose 42% in the six months through September from a year earlier,
but declined slightly in France and Germany, according to Oxford Economics.
Worker productivity also has risen in the U.S. during the pandemic, but
has been flat or down in Germany, France, Italy and Spain, according to
Deutsche Bank. The U.S. had already outpaced Europe in productivity
growth since the 1990s, largely because European businesses were slower
to adopt new information technologies. Eliminating unviable jobs and
businesses generally is responsible for about half of long-run
productivity growth, some economists say.
Meanwhile, the pandemic is accelerating a shift toward new digital
business models and automation of processes. Some habits may stick, such
as working and shopping from home, permanently reducing the demand for
certain services in sectors such as retail or travel. If the shape of
the economy looks very different in a couple of years, anything that
delays the adjustment to that shock is going to be costly.
Europe’s enthusiasm for job-furlough programs is partly based on
Germany’s experience during the 2008-09 global financial crisis, when
its program helped to hold down unemployment and quickly restart the
economy once demand recovered.
This time, the support to workers and businesses is vastly larger, as
governments sweetened or made it easier to access the programs. Almost
eight million workers were in job-retention schemes in Germany, France,
Italy and Spain in November, or roughly 7% of all workers in those
countries, according to the European Central Bank. That was down from
about 24 million in April, but still a larger share of Europe’s
workforce than at the worst of the financial crisis in 2009.
Furloughed employees typically work reduced hours, or in some cases
none, while receiving a portion of their salary. In Germany, such
workers cannot undergo training unless it is designated by the labor
office, or even be required to look at work emails. In Italy, they
usually may not take part-time jobs because they might be called back to
work from one day to the next.
At Germany’s Recaro Aircraft Seating GmbH, which makes seats for
European, U.S. and Chinese airlines, sales fell 60% last year to about
€300 million. Chief Executive Mark Hiller doesn’t expect sales to return
to pre-crisis levels for five years. Some executives and airlines
predict business travel won’t ever return to previous volumes.
The warehouse area of a Recaro factory in Qingdao, China, in 2018.
Photo: Qilai Shen/Bloomberg News
Recaro cut about 30% of jobs at its factories in the U.S. and China last
year, but in Germany it hasn’t reduced its workforce of roughly 1,100.
Instead, it has tapped the government program, which pays its workers up
to 87% of their salary, to a maximum of almost €5,000 a month, to stay
home. Almost the whole of Recaro’s workforce is on furlough, working on
average 40% fewer hours than normal.
Recaro has agreed not to lay off employees until at least mid-2023. The
high cost and legal complexities of doing so in Europe deter many
companies from cutting staff.
But job-retention schemes “can only bridge the gap until we’re back on a
higher level,” Mr. Hiller said. “If we need to adapt to €300 million
[sales] forever, it won’t work.”
Most of his competitors, including in the U.S., are cutting deeper. U.S.
defense group Raytheon Technologies Corp. cut a fifth of the workforce
in its commercial aerospace division after sales at a unit that competes
with Recaro fell 26% last year. Raytheon doesn’t plan to hire all of the
people back and will instead automate functions.
The hospitality sector has taken a big share of the furlough programs
this time, a change from the 2008-09 recession, when they were tapped
heavily by manufacturing companies.
The case for protecting jobs is weaker in less knowledge-intensive
sectors such as hospitality, some economists say. Young people might be
using these jobs as a steppingstone, so there could be less value in
preserving the specific skills and relationships workers have built up,
said Dan Andrews, a former Australian Treasury official now at the
Organization for Economic Cooperation and Development. He said some
low-skilled jobs might eventually disappear for good, such as those
serving business travelers, as the pandemic accelerates digitization.
A barred shop window in the central Vittorio Emanuele II Gallery in
Milan, in November.
Photo: daniel dal zennaro/EPA-EFE/Shutterstock
Before Covid-19 struck, Orlando Gomes’s business was setting up tents in
Portugal at about 30 events every weekend, from international fairs to
weddings. Now his company, Multitendas, is lucky if it gets one event a
weekend. Most of his roughly 150 employees have been on furlough for 10
months, paid most of their salaries by the government to stay home.
Mr. Gomes is waiting, hoping for business conditions to improve. He
recently received a state-backed credit line for €1.5 million. Switching
into new sectors seems impossible, he said, because his work is highly
specialized.
“I had planned to decide by year-end whether to shut down or stay in
business, but with a vaccine on the horizon, I figure I’ll wait a couple
of extra months,” Mr. Gomes said. Some of his workers have left for
other sectors such as construction, but most are staying put.
Half of German companies have halted or delayed transformation and
innovation projects as a result of furlough programs, according to a
survey by Boston Consulting Group.
Job-retention schemes are “a little bit too easy. You can delay
decisions and remain in your comfort zone as a manager,” said Karl
Haeusgen, president of the German Mechanical Engineering Industry
Association, a lobby group for a sector that employs around 1.3 million
people.
Economists and business executives also say business subsidies could
increase the share of “zombie” companies that struggle to earn enough
over time to cover their debt-servicing costs, and that can undercut
prices charged by healthier competitors. In Germany, the share of zombie
companies could increase to 20% of all businesses this year from 7%
before the pandemic, according to research by Creditreform, a German
credit agency.
Alexander Alban, managing partner at German mechanical parts
manufacturer Walter Schimmel GmbH, hustled last year to keep his
business in the black—cutting staff, putting workers on furlough and
canceling plans for a new factory—as he coped with a 25% decline in sales.
Though demand fell, a third of that revenue drop was due to a roughly
12% fall in market prices, Mr. Alban said, as struggling local
competitors using government support offered low prices to stay afloat.
“These zombie companies...run their business for a couple of months
below costs,” Mr. Alban said. “They ruin the market. Afterwards, it’s
very hard to get this business back. Usually it’s good if the market is
cleaned.”
At the Italian employers’ organization Confindustria, an official said
trying to freeze work as it was could be a mistake because it delays
necessary corporate reorganizations and new hires.
Photo: Guglielmo Mangiapane/REUTERS
In Italy, widespread use of job-retention schemes hurt labor
productivity growth during the 2008-09 financial crisis, according to a
2018 paper by Giulia Giupponi of Bocconi University in Milan and Camille
Landais, a professor at the London School of Economics. The least
productive firms were three times more likely to tap the job-retention
scheme than their stronger peers, the researchers found.
In Italy, through early December, 29% of all workers had been placed on
furlough since the start of the pandemic, a total of about 6.7 million
people.
The furloughs, the ban on layoffs and generous credit helped save about
400,000 jobs during the pandemic, according to an independent report by
Bank of Italy researcher Eliana Viviano.
Antonio Gullo, who lives in Turin, the heart of Italy’s shrinking auto
industry, has been in and out of furlough since 2001. He now works for
Lear Corp., a Michigan-based maker of seats and electronics for the car
industry. His last full month of work was in 2015, and in two decades he
has never had more than 18 months in a row of full-time work, he said.
He is currently working about six days a month.
“We live in a state of constant uncertainty; it’s impossible to plan out
your life,” said Mr. Gullo, 43, who is on a production line making seats
for Maseratis. “Leaving the factory isn’t an option because there aren’t
any full-time jobs out there.”
Share Your Thoughts
Which model, the European or the American, will prove most effective at
achieving economic renewal after the pandemic? Join the conversation below.
With so many on furlough, German business groups have warned recently of
a shortage of skilled workers in a nation where the unemployment rate is
just 4.5%, particularly in energy, mechanical and civil engineering and
health.
Germany’s sweetened job-furlough scheme has “crazy consequences,” said
Friedrich Merz, a senior politician in Chancellor Angela Merkel’s
Christian Democratic party. “Employees are kept in businesses even
though they are needed in other places.”
Still, some businesses say the European model is better in the long run.
The U.S. model weakens the bond between a company and its employees,
reducing the incentive for businesses to invest in training, said Gerd
Ohl, general manager of Limtronik GmbH, an electronics manufacturer
based near Frankfurt. He said he had trained American employees in
Germany to work for his U.S. subsidiary, only to see them leave the
company soon after they returned to the U.S.
Workers at Heidelberger Druckmaschinen's factory.
Photo: HEIDELBERGER
At Heidelberger Druckmaschinen AG , a maker of printing presses in
southern Germany, revenue has fallen about 20% and is unlikely to return
to its pre-crisis level for about five years, said Marcus A. Wassenberg,
chief financial officer. He said around half of the company’s staff are
on furlough, down from 80% early in the pandemic, and the company
claimed about €85 million via the job-retention program last year.
Mr. Wassenberg said the furlough program was part of a broad net of
social protections that helps stabilize Germany’s economy and share the
fruits of growth between managers and workers, making its society better
able to absorb global shocks.
—Patricia Kowsmann contributed to this article.
Write to Tom Fairless at tom.fairless-at-wsj.com and Eric Sylvers at
eric.sylvers-at-wsj.com
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