Europe Spends Billions in Government Subsidies To Avoid Massive Unemployment

Matty-Sways

Europe is subsidizing millions of paychecks and companies want to keep it that way.

Instead of mass unemployment, European companies held onto their workers during coronavirus lockdowns, using state subsidies to cover their payrolls.

Europe strategically placed tens of millions of workers on paid leave to prevent the widespread unemployment that has been seen in the U.S. These companies are now using billions in state subsidies waiting for business to reopen. As the lock downs are lifted, businesses say they still need months of government support. The demands are heaviest in entertainment and tourism.

Catherine Querard, who owns several restaurants and a hotel around the French city of Nantes, benefits from a government program that currently pays up to 84% of her employees’ salaries.

“We’ll have less clients that’s for sure. So that means we won’t need as many employees,” Ms. Querard says. She expects her restaurants to operate at somewhere between 30% and 50% of capacity while increasing spending on hand sanitizer and protective equipment to reassure clientele.

European governments have doled out significant amounts to fund these assistance programs.

France has spent an estimated €24 billion ($26.15 billion) to fund Europe’s biggest paid-leave program for two months, supporting more than half of the country’s entire private-sector workforce. The government plans to phase out its subsidy programs sector-by-sector over the next few months.

“We need to encourage the activity to restart,” French Labor Minister Muriel Pénicaud said. “At some point it’s reasonable for companies to pay part of the paid leave. It will be measured so it’s not a cleaver in terms of employment.”

Unlike major economies on the continent, the U.K. didn’t have a paid-leave program in place when the pandemic hit. In response to the crisis, the Coronavirus Job Retention Scheme began paying up to 80% of the wages of 7.5 million workers at 935,000 businesses. Recently the U.K. Treasury chief Rishi Sunak extended the program until October, rather than terminating in June. In August businesses will be forced to pay a larger share of wages as workers put in more hours.

The Office for Budget Responsibility, an independent state body that monitors the costs of government programs, estimate that the U.K.’s program will cost £56 billion ($68 billion), £42 billion more than when it was launched.

“Nobody expected such a massive increase in claims. The numbers are very, very large,” said Stefano Scarpetta, Director of Employment at the Organization for Economic Cooperation and Development. Mr. Scarpetta said governments across Europe are discussing how best to modify the programs. “The general rule is that they have to be targeted on those firms that have a future, and temporary, or the cost will become pretty massive.”

In April, unemployment in Germany rose by 300,000 to 5.8%, and the German government now pays up to 87% of a worker’s salary (up from 67%). 750,000 businesses communicated their intention to put as many as 10.1 million workers on subsidized leave by April 26, according to the Federal Labor Agency. Germany extended the length of the assistance the program from 12 to 21 months.

Andrea Knebel, a business consultant at Robert Bosch GmbH in southwest Germany, has been on paid leave since April 1, along with her entire department. Germany’s Federal Labor Agency pays Ms. Knebel 67% of her lost wages, but that is topped up by Bosch to as much as 90% as a result of an agreement negotiated by the IG Metall metalworkers’ union.

Ms. Knebel thinks she will be able to return to work, though she doesn’t know when. Some of her co-workers worry about losing their jobs in the uncertainty of the crisis.

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