How do we ‘restart’ our economies as we come out of the pandemic?
As new data becomes available, we observe that market dynamism is increasing: as we make good progress with vaccinations, we can afford to move and interact more with one another. Restarting the economy is about removing restrictions, opening up all economic sectors that were forced to close and continuing to support productive capacity while demand remains below normal. The objective is to sustain productive capacity and prevent it from falling.
How effective has fiscal policy been at keeping economies afloat?
The objective of support was two-fold: sustain people in employment and ensure that productive capacity remains active. When we look at the levels of employment the news is very good. However, the burden was not equally distributed and those with average or below-average education were hit hardest. Managing the fall-out from this and its long-term implications is going to be part of the phasing out of measures. When it comes to productive capacity, the picture is less clear. The level of bankruptcies is still way below the pre-pandemic trend. This is artificially sustained as firms in Europe are still discouraged or even prohibited from closing. At the time, the number of new firms being created, which took a dip, has returned to pre-pandemic levels. This is the level of dynamism that I mentioned earlier. It is important now to phasing out some of this support.
What can we learn from past support measures?
The first question is: how do we phase out current measures? The two components of this are timing and sequencing. What we will need to monitor and evaluate is whether aid given actually helped the productive segments of the economy. There is a trade-off in that the quicker support is given, the more indiscriminate it is, and therefore measures end up also supporting firms that would otherwise exit the market. We are now beginning to gather evidence on this issue. Our preliminary analysis tells us is that the least productive firms were indeed hit the hardest, known also as the “cleansing effect”. It is less clear whether government support ended up in productive segments of the economy or was also absorbed by less productive firms. More on this in our MICROPROD research hopefully in early autumn.
Listen to the podcast episode on restarting the economy with Carlo Altomonte, Maria Demertzis, Filippo di Mauro and Steffen Müller.
Marie Demertzis is Deputy director of Bruegel.
