Equity Support for Europe’s Mid-Cap Firms Seek to Alleviate Struggling Factor Markets
The turn of the third fiscal quarter has prompted the European Commission, among other institutions, to leverage small businesses against bankruptcies through public stakes.
The ongoing fiscal crisis differentiates itself from 2008 through the government-mandated restriction of economic activity, bearing supply-cum-demand shocks and dismal global projections for the year’s remaining fiscal quarters. The pandemic’s recent gradual resurgence has prompted concerns of the United States developing a double-dip recession, strongly emulating that of Europe in 2008 and 2009.
Over the last decade, European institutions and ruling bodies have outstretched the United States in generalized social insurance and welfare systems. Germany’s implementation of Kurzarbeit, or “short-work” provides highly-categorized subsidies to employers, increasingly those of small or medium-sized firms, as compensation for lost income incurred by shortened employee hours. While Germany’s economy remains apt to provide such degrees of public financial aid, others among the European Union have emulated similar discretionary fiscal policies, though more artificial in nature for regions incurring a mandated economic shutdown to that of a traditional economic crisis [1].
Debt and liquidity burdens have severely stressed monetary institutions, where European policymakers are avid in minimizing the risk of mass bankruptcies to ensue in the coming months. Early efforts to heavily support large corporations in the common free-market Friedman fashion are now contrasted with proposals of populating public stakes in small and mid-cap businesses. The Bank of England and the European Commission have publicly addressed their revisitation to such options in coincidence with their depletion in capital.
The European Commission has further addressed corporate solvency as the principal characteristic of a possible rise in bankruptcies, compounding the severity and unfortunate lifetime of non-performing loans. With reductions to the initial policy support during the first phase of the pandemic imminent following the European Parliament and Commission’s recommendation, governments may turn to equity interjections as an alternative, reinforcing the self-sufficiency of large corporations [2].
Dismal projections of governments venturing deeper into economies have been proposed by economists and research institutions, for massive lump-sum subsidies or loans could severely disrupt the cashflows of small businesses and stave off macroeconomic recovery. Jan Krahnen, director of the Leibniz Institute for Financial Research, speaks of the institution's conclusions of such policies, where “a risk that companies will have to ramp up debt to such an extent during the crisis that aggressive investments afterward become unlikely”.
However, Europe's social net still serves as a semi-automatic stabilizer for low-income or unemployed individuals without the need for possibly-excessive and lump federal packages, as seen in the United States. The Department of Treasury was inefficient in its distributions and the constructions of fund deliveries lacked the specificity of European counterparts. Despite the United States being a single country, the partisan American response has posed more frantic and fractured than multinational European committees. Reinforced multilateral cooperation remains vital, as countries facing external funding depletion could now draw from the debt relief of a global financial safety net.
In another facet of massive spending packages, to offset the particularly adverse economic ramifications to low-income households across the world’s more populated countries, increased government spending is projected to further catalyze features of debtor nations, to varying extremities. Regardless of each countrys’ precise monetary solution, the International Monetary Fund has projected an increase in global debt of 19 percent adjusted for gross domestic product [3].
Queries of whether European fiscal generosity is simply staving off future economic recovery for immediate employment crisis mitigation are not easily presentable in the face of a disgruntled populace, where the average rational consumer has comparatively smaller concern for complex economic trends over their localized employment security and disposable income, a soft similarity to Friedman’s confrontation of “naive Keynesian theory”.
In the United States, where public figures leverage capsizing markets and demographical crises for political gain, where subjective endeavors and equivocal surface-level societal pressures dominate the public’s limited opinion of the incumbent administrations and other governing bodies’ economic response to the global pandemic, much can be even qualitatively observed, with ample wariness, from Europe’s progressively anti-partisan and empirically-centered policy construction.
[1] Asen, E. (2020, March 25). A German Export for Times of Crises: The Short-Time Work Scheme. Retrieved July 19, 2020, from https://taxfoundation.org/kurzarbeit-germany-short-work-subsidy-scheme/.
[2] European Commission. (2020, May 29). Statement by Executive Vice-President Margrethe Vestager at the press conference on Solvency Support Instrument [Press release]. Retrieved July 19, 2020, from https://ec.europa.eu/commission/presscorner/detail/en/statement_20_973.
[3] World Economic Outlook Update, June 2020: A Crisis Like No Other, An Uncertain Recovery. (2020, June 01). Retrieved July 19, 2020, from https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020.
