Denmark’s Idea of ‘Freezing the Economy’ Could Help the World Avoid a Great Depression: Report
While the White House and lawmakers haggle over the terms of an emergency economic-stabilization package, Denmark has gone big—very, very big—to defeat the unprecedented challenge of the coronavirus, says a report from The Atlantic.
 
As per the report by Derek Thompson, this week, the Danish government told private companies hit by the effects of the pandemic that it would pay 75% of their employees’ salaries to avoid mass layoffs. The plan could require the government to spend as much as 13% of the national economy in three months. That is roughly the equivalent of a $2.5 trillion stimulus in the US spread out over just 13 weeks. 
“Like I said,” Thomson says, “this is very, very big”. 
 
According to him, this response might strike some as a catastrophically ruinous overreaction. “Perhaps for Denmark, it will be. But we are at a fragile moment in American history. The US faces the sharpest economic downturn in a century, and statistics that seem impossibly pessimistic one moment look positively optimistic hours later. In weeks—even days—Denmark’s aggressive response could be a blueprint for how the world can avoid another Great Depression,” he added.
 
To find out more, Thomson says he corresponded with Flemming Larsen, a professor at the Center for Labor Market Research at Denmark’s Aalborg University, over two days of emails and an hour-long Skype call. The following interview blends those conversations, which have been edited for length and clarity.
 
Here are the excerpts from the interview…
 
Derek Thompson: Could you first give me a sense of what’s happening on the ground in Denmark? What do the streets look like?
 
Flemming Larsen: Denmark has nearly entirely closed down universities, schools, public institutions, restaurants, museums, and cinemas. No assembly of more than 10 persons is allowed. The borders have been closed too.
 
Thompson: Denmark’s government has announced a very aggressive plan to help workers in the next few months. Tell me what it’s doing.
 
Larsen: Denmark’s government agreed to cover the cost of employees’ salaries at private companies as long as those companies do not fire people. If a company makes a notice saying that it has to either lay off 30% of their workers or fire at least 50 people, the state has agreed to take on 75% of workers’ salaries, up to $3,288 per month. (This would preserve the income for all employees earning up to $52,400 per year.)
 
The philosophy here is that the government wants companies to preserve their relationship with their workers. It’s going to be harder to have a strong recovery if companies have to spend time hiring back workers that have been fired. The plan will last for three months, after which point, they hope things come back to normal.
 
Thompson: So, the government is offering to pick up the tab for workers whose employment is threatened by the downturn. Couldn’t companies easily defraud the government and collect the money anyway?
 
Larsen: Maybe, but the workers compensated are not allowed to work in the period. Workers staying with the company do not receive the 75% compensation.
 
Thompson: Some American economists say the US should copy Germany’s work-sharing plan, Kurzarbeit, in which workers’ hours are reduced and then the government takes on part of workers’ salaries. Is Denmark’s plan like that?
 
Larsen: Not exactly. In the German plan, the government and the employer share the cost of paying for work. Here, the government is paying companies for employees, who are going home and not working. These workers are being paid a wage to do nothing. The government is saying: Lots of people are suddenly in danger of being fired. But if we have firing rounds, it will be very difficult to adapt later. This way, the company maintains their workforce under the crisis and people maintain their salaries. You are compensating people even though they have to go home.
 
Thompson: I think I understand you, and I’m going to try to summarize, but tell me if this summary is wrong: Denmark is putting the economy into the freezer for three months. You’re saying: We know that all these people won’t be able to work for the next few months. It’s inevitable. Rather than do rounds of firing followed by rounds of hiring, which will delay the recovery, let’s throw the whole economy into a deep freezer, and when the virus winds down we can thaw it out and almost everybody will still be with the company they worked for in January.
 
Larsen: That’s exactly it. We are freezing the economy. Because otherwise the government is afraid of the long-term damage that this will do to the entire system. The hope is that this will be over in three or four months, and then we can start up society again.
 
Thompson: What else is Denmark’s government proposing?
 
Larsen: There are a few things. To prevent the financial sector from shutting down, the state will guarantee 70 percent of new bank loans to companies. This will encourage more lending even in the case of more bankruptcies.
 
Also, people on unemployment benefits are put on pause. Typically, people have to go to meetings at job centers and make a certain number of job applications to receive jobless benefits. There are a lot of rules. But those rules are suspended for now. There are no requirements. The other part of the pause is that, while you can only be on unemployment benefits for two years in Denmark, people who pass that threshold will still receive benefits. Again, we are freezing everything.
 
Also, the state agreed to compensate companies for their fixed expenses, like rent and contract obligations, depending on their level of income loss. If they typically sell $1 million in a period, but now they can only sell $100,000, they lose 90% of their income. That will qualify them to receive large government help to cover fixed expenses…
 
Also, the spring payment of taxes for companies have been postponed until autumn, and all public employees will keep their salaries when sent home.
 
Thompson: This sounds incredibly bold and incredibly expensive. How much does the government expect this is going to cost?
Larsen: The cost is 287 billon DKK. 
 
[Over email, we worked out that this is the equivalent of approximately 13% of the country’s GDP. In the US, that would be about $2.5 trillion.]
 
Thompson: How does this response compare with what Denmark did during the global financial crisis in 2008?
 
Larsen: Back then, there was nothing at all at this scale. There was no huge amount of spending. The government was worried about public debt. There was a huge, long debate about whether Denmark should spend a lot of money at all. And Denmark had one of the highest increases in unemployment during the last crisis.
 
But today, the Danish economy is extremely strong. We have a huge surplus. We have a negative interest rate. There is a lot of public savings. So there is a lot of room to do this now. Also, the political environment has changed. We’ve tried to make higher investments in welfare spending in the last few years.
 
Thompson: It sounds like 10 years ago, there was a debate about stimulus. But today, everybody agrees that you just have to save the economy.
 
Larsen: Yes. They just want to save the economy. The philosophy is, if we don’t do it now, it will be more expensive to save the economy later. We’ve seen what the virus can do in Italy, in Spain. So, I think people are very concerned. We are facing a huge, huge crisis.
 
Thompson: I have to admit that it’s rather jarring to hear about a country agreeing in a matter of days to do something this big. Your government could spend more than 10 percent of your GDP before July.
 
Meanwhile, in the US, we’re still debating the size of government-signed checks that citizens might not receive for several months. There is a profound difference in both the speed and size of the government response.
 
Larsen: I have to say that the decision-making process in Denmark has been very extraordinary. We have 10 parties in Parliament. From the very left-wing to the really, really right-wing. And they all agree. There is nearly 100 percent consensus about this. And that’s really amazing. People are convinced that it’s wise to do this now.
 
Many of these policies are made as tripartite agreements between unions, employers’ associations, and the state. That’s because, in Denmark, most labor-market regulation is done by the unions and the employers’ associations. They regulate the labor market mainly through their own collective agreements. To make all this possible, you need the unions and employers’ associations to be a part of these agreements. That is very difficult. But they succeeded rapidly. In a matter of days, this was a signed agreement.
 
Thompson: Do you think it’s a good idea?
 
Larsen: I don’t know. Nobody knows for sure. This is unknown territory. I think it’s a good attempt. If you ruin people’s private lives and companies go bankrupt, it will take years to build this up again. So I think it’s a wise decision.
 
 
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    COMMENTS

    ssk.pab

    2 months ago

    India needs something like this-for organized and unorganized sector.

    m.prabhu.shankar

    2 months ago

    Great Great. Excellent.

    vinayvictor

    2 months ago

    UK is paying all employees 80% upto 2500 GBP , bold move but much welcomed across the country

    nasirahmed417

    2 months ago

    Wow. The rich countries will tide over this crisis. Its the third world countries that will bear the brunt of Covid 19 and that's a disaster which will happen 1000%, there isn't any doubt. We are not ready and will pay a significant price. God Save the poor countries.

    Germany announces aid package worth USD166.5 bn, biggest since WW2
    Germany has approved a massive and unprecedented financial aid package of 156 billion euro ($166.5 bn), the largest in the country since the Second World War, to offset the socio-economic damage caused by the coronavirus pandemic.
     
    The stimulus package is designed to ease the burden on hospitals and clinics and supply financial aid to save jobs and companies that have been affected by the pandemic, reports Efe news.
     
    "The corona pandemic is changing our whole lives," said Olaf Scholz, Finance Minister and Vice-Chancellor, said on Monday while explaining why the government was taking "the necessary and correct" step of unveiling such an enormous economic aid package.
     
    "We will do everything we can to prevent this crisis from endangering the health care of our citizens or the economic processes in this country."
     
    German authorities fear a severe recession due to the crisis, with the decline in Gross Domestic Product (GDP) expected to be "at least as high" as in 2008/2009, Minister of Economy Peter Altmeier warned while announcing a bailout fund of up to 600 billion euros for larger companies.
     
    German Health Minister Jens Spahn, meanwhile, said that hospitals and clinics requiring additional staff, beds and equipment would receive financial support.
     
    "If you need more beds, if you need more staff and equipment to treat coronavirus patients, you will be compensated financially," Spahn said.
     
    Chancellor Angela Merkel attended the cabinet meeting from her home office, where she has been in quarantine since Sunday after coming into contact with a doctor who tested positive for coronavirus.
     
    "She is simply in home office, as are many other people who have had to place themselves in self-isolation at home," Scholz told reporters.
     
    "She is active: we had the cabinet meeting together this morning."
     
    The Minister added that he would speak in Merkel's stead in the Bundestag lower house of parliament session on Wednesday.
     
    Despite Merkel being forced into preventative isolation, Germany is "seeing signs that the exponential growth curve is flattening off slightly", said Lothar Wieler, the head of the Robert Koch Institute, on Monday, although he cautioned that a fuller picture would only be available from Wednesday.
     
    Wieler said he was optimistic that social distancing measures taken last week and over the weekend, including the closure of schools and bans on all public gatherings, had helped to limit the virus's spread.
     
    Germany has recorded 115 deaths out of more than 26,220 cases of the coronavirus, making it the fifth-worst affected country by number of infections, behind Spain (over 35,156), the US (46,371), China (81,545), where the virus originated, and Italy, which is now the epicentre of the pandemic with 63,927 cases and 6,077 deaths on Monday, according to John Hopkins University.
     
    The COVID-19 disease has killed 16,557 people worldwide out of 381,499 confirmed cases. A total of 101,794 people have recovered.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
     

     

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    Coronavirus Crisis is Crushing GDP Growth. “We Are in Global Recession Territory,” says Fitch
    The global health crisis sparked by the outbreak of the coronavirus (COVID-19) is taking an extraordinarily heavy toll on the world economy. The coronavirus crisis is crushing global gross domestic product (GDP) growth and it would fall to 1.3% in 2020 from 2.7% in 2019, which would be weaker than global downturns in the early 1990s and in 2001, says Fitch Ratings.
     
    "For all intents and purposes we are in global recession territory," warns Brian Coulton, chief economist at Fitch Ratings.
     
    In its latest quarterly global economic outlook (GEO), the ratings agency have nearly halved the  baseline global growth forecast for 2020 - to just 1.3% from 2.5% in the December 2019 GEO.
     
     
    It says, "The revision leaves 2020 global GDP USD850 billion lower than in the previous forecast. But we could very easily see an outright decline in global GDP this year if more pervasive lockdown measures have to be rolled out across all the G7 economies. Emergency macro policy responses are purely about damage limitation at this stage but should help secure a 'V-shaped' recovery in second half (2H) of 2020, although this assumes that the health crisis eases."
     
    Talking about India, the ratings agency says, its scenario assumes the number of people affected will keep rising in the coming weeks but that the outbreak will remain contained. However, there are downside risks to this scenario in India, it added.
     
     
    According to Fitch, while India’s linkages with China, for example in trade and tourism are modest, domestic manufacturers are heavily reliant on key Chinese intermediate inputs – especially of electronics and machinery and equipment and supply-chain disruptions are expected to hit business investment and exports.
     
     
    It says, "The difficulties facing the Indian economy have been exacerbated by another bank failure (Yes Bank). Fragilities in the financial system will further undermine sentiment and domestic spending. The overall financial system remains burdened with weak balance sheets, which will limit any upside to credit and growth despite policymakers’ efforts in recent months to ease stresses."
     
    "Given downside pressures on growth, we think the Reserve Bank of India (RBI) will have to take additional measures and we forecast a cut in the policy rate to 4.5% before the end of the year. On the fiscal front, the authorities announced targeted stimulus measures to mitigate the impact of the outbreak. We see GDP growth to remain broadly steady at 5.1% in the fiscal year 2020-2021 following growth of 5.0% in 2019-2020," Fitch Ratings says in the report.
     
    As per Fitch, the COVID-19 shock to the Chinese economy has been very severe and its GDP is likely to fall by over 5% (not annualised) in first quarter of (1Q) 2020 and to be down by 1% year-on-year. It says, "Falling GDP in China is virtually unprecedented and, in the near term at least, these numbers look worse than most previous hypothetical 'hard-landing' scenarios. The good news is that the daily number of new COVID-19 cases in China has fallen very sharply, which should pave the way for a marked economic recovery in 2Q19 - high-frequency indicators already point to this starting in March."
     
    "Nevertheless, the delayed impact of supply-chain disruptions and lower Chinese demand on the rest of the world will continue to be felt profoundly for some time, particularly in the rest of Asia and the Eurozone," it added.
     
    Moreover, Fitch says, the rapid spread of the virus outside China has prompted sharp declines in travel and tourism, and the cancellation of business and leisure events worldwide as 'social distancing' takes hold. "And some other large advanced countries - most notably Italy and Spain and more recently in France, though after our forecast numbers were finalised have engaged in aggressive official lockdown responses similar to those seen in China. These countries are likely to see very sizeable outright declines in GDP in the coming months," it says.
     
    The interruptions to economic activity seen in China - and now in Italy - are on a scale and speed rarely seen other than during periods of military conflict, natural disasters or financial crises. While there is huge uncertainty, quarterly declines in GDP of 3% to 5% (not annualised) in a full lockdown scenario look feasible, Fitch says adding that the risk is that it shortly see these abrupt interruptions happening simultaneously across all major economies as the global pandemic spreads.
     
     
    "Our baseline global economic forecasts have been aggressively lowered. Even though we expect a recovery in China from 2Q20, Chinese growth is expected to fall just 3.7% for the year as a whole, down from 6.1% in 2019. We forecast Italian GDP to fall by 2% this year and Spanish GDP by almost 1%. Our baseline forecasts do not yet assume that full-scale lockdowns take place in across all the major European countries or the US (forecasts were finalised on 16 March). But even on this basis we now expect Eurozone growth to be minus 0.4% this year. The baseline forecast for US growth is 1% in 2020 compared with a pre-virus outlook of 2% and GDP is expected to fall by 0.5% (or 2% annualised) in 2Q2020," Fitch says.
     
    This, according to the ratings agency reflects the likelihood that travel, tourism, and business and leisure events will be disrupted for months, the collapse in the equity market, lower business and consumer confidence, and other disruptions to US economic activity that are emerging as authorities seek to contain the virus. 
     
    Fitch says, the high risk of escalating lockdown responses across the major economies means that the chances of a weaker outcome are very substantial. "A downside variant to our baseline forecast shows global GDP falling this year - an extremely rare occurrence in the post-war period - with GDP in Europe down by over 1.5%, US GDP down by nearly 1% and Chinese growth slipping to just over 2%," it added.
     
    The ratings agency's oil price forecast has been lowered to USD41 per barrel (Brent) for 2020 annual average from USD62.5 per barrel in the December GEO. It says, "With the collapse of 'OPEC+' co-operation boosting prospects for OPEC supply, we now expect oil prices to average USD48 per barrel in 2021 compared to our previous forecast of USD60 per barrel".
     
     
    Following a similar playbook to the global financial crisis, emergency macro policy responses are being announced on a massive scale by several countries. These include aggressive interest rate cuts, huge injections of central bank liquidity, macro-prudential easing and the creation of credit support facilities. Large-scale fiscal easing packages and the unveiling of hundred billion dollar-scale sovereign credit-guarantee schemes are also being used to help the private sector withstand shocks from measures necessary to contain the health crisis.
     
    "Rapid and large-scale macro policy responses are all about damage limitation in the near-term, but policy easing should help GDP normalise and recover quickly in the second half of the year on the assumption that the health crisis subsides," says Coulton, adding "However the uncertainties here are huge and we are really only at the beginning of the process of trying to understand the full impact of the crisis on the world economy".
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