2021: A decisive year of decisions

At the beginning of 2020, the shock was as sudden as it was unexpected and the past year continued to be exceptional in many ways: healthcare systems and hospitals overwhelmed because of the virus, health measures, population lockdowns, massive use of teleworking in sectors where it is possible, administrative closures of businesses, etc. Countless unprecedented measures.

So what does 2021 have in store for us? As the year begins, the same words that characterised 2020 come to mind first: uncertainty, caution and volatility. The year 2021 will be decisive in many respects for much of the population, including entrepreneurs, the self-employed, employees, students, politicians, etc. Difficult and complex decisions, and therefore brave, are required in terms of life in society, whether for health, education, the economy, public finances, culture, sports, public governance, and so on.

The central theme that will be foundational to the decision-making process in 2021 no doubt concerns generalised vaccination, the only way to overcome the pandemic and to return, hopefully, to a more ‘normal’ economic and social life. However, will the vaccination strategy really ensure a return to a ‘new normal’ and the recovery of the economy? We must remember that economic activity is nothing more than an aggregation of constraint-free interactions based on trust between thousands of people: the more these interactions are restrictive and ‘distant’, the more difficult it is to conceive them with peace of mind. With that in mind, I’ll share some personal reflections on the socio-economic state of play at this start of the new year.

What recovery scenario?

Letters of the alphabet are used to demonstrate possible scenarios for economic recovery, usually more or less optimistic: V is for an abrupt shock, with a recovery of the same magnitude; W characterises multiple shocks with recovery; L is for a shock followed by a long period of economic downturn, etc. The imagination being limitless, some economists illustrate the recovery with a Nike logo, that is to say that after having plunged, activity will restart gradually, allowing the GDP to return to its pre-crisis level, after two to three years at most. But today, with the successive lockdowns and measures to restrict activities, it is a K-shaped evolution that perfectly describes the current situation and the medium-term prospects, marked by a very uneven evolution between the different sectors, but also within the latter.

The sectors whose business plan is based on assembling, meetings and human contact remain the most vulnerable: Horeca, events, tourism, certain retail businesses (particularly in the city centre and in certain shopping centres), travel agencies, cultural activities or even the self-employed, will normally evolve on the lower ‘branch’ of the K.

Other sectors, through their resilience or an activity that is less dependent on direct human contact, have been and will remain little affected by the crisis (ICT, finance, non-vendor services, real estate, etc.). After lockdowns and a halt or slowdown, other sectors have found their way back to sustained growth, such as in construction, industry and logistics.

This K-shaped evolution also includes underlying factors directly influencing the extent, steadiness and duration of a recovery or decline: consumer, supplier and investor confidence, external demand, effectiveness of state aid, legislative and regulatory frameworks, etc.

And what if the K also applied to European States? The financial impact of the pandemic does indeed appear to be more marked in southern Europe than in the North, and will undoubtedly weigh on their economic recovery. Divergences between European economies, although already present, seem to have widened.

Support weakened sectors through the crisis until the end of the pandemic

If Schumpeter spoke of ‘creative destruction’, that is to say the demise of businesses (or even of entire industries) in favour of the creation of new ones as a natural and profitable movement for the economy and society as a whole, it is not the goal in this specific case of an economic crisis emanating from a global health crisis. Some companies (young; innovative), in good health and in a development and growth phase in 2020, have been hit hard. Letting this economic substance disappear – along with the jobs, the capacity to invest, innovate and contribute to tax and social security revenues that go with it – will only slow down recovery and weaken its momentum. Schumpeter predicted a ‘natural’ disappearance of businesses and industries, not a virus that attacks the foundations of perfectly healthy, up-to-date businesses. Knowing that the growth which is lacking in the two years of 2020 and 2021 – estimated at around 5% – cannot be caught up in a few months, it is better to focus on growth potential, while maintaining an attractive, competitive and diversified economic fabric. The challenge will be to ensure that this lost 5% is just an ‘air pocket’, followed by an evolution that is certainly a shift down but parallel to the pre-crisis trajectory. In the event of the destruction of perfectly viable economic fabric and a lasting crisis of confidence leading to underinvestment (in tangible and non-tangible things, such as human capital, for example), the temporary ‘air pocket’ risks turning into a permanent stalling.

While waiting for a larger immunity of the population through a generalised vaccination, which will take longer than initially hoped, it is very likely that the coming months will still be marked by new lockdowns and ongoing restrictions, sometimes lightened, then tightened, and therefore a volatile, jagged evolution of economic and social life, dependent on the development of the number of infections and the occupancy rate of hospitals.

The sectors on the lower branch of the K (Horeca, events, travel agencies, culture and entertainment, certain personal services, etc.) will require an extension of state aid with simple payment methods and clear and transparent eligibility criteria. The same is true for the thousands of self-employed workers, heavily hit by this crisis, as their status is less advantageous than that of salaried employees and their at-risk-of-poverty rate is much higher.

So far, the real impact on public finances of the aid for businesses can be considered limited. Until the end of October 2020, non-reimbursable aid amounting to approximately EUR 120 million has been allocated. Repayable loans (up to a maximum of EUR 500,000 per company) were granted for EUR 136 million and state guaranteed loans were processed for an amount of EUR 150 million. The amount actually owed to companies (after deduction of advances paid by the employment agency, ADEM, Agence pour le développement de l’emploi) for partial unemployment should reach an amount of around EUR 500 million for 2020.

The one-off aid paid to the self-employed until the end of October barely reached EUR 20 million. Fortunately, a new law which will be adopted in the coming days provides for the (unfortunately one-off) payment of EUR 3,000, 3,500 or 4,000, depending on the contributory base of the eligible self-employed. The contributory limit of 2.5 times the minimum social wage, beyond which the self-employed are not eligible to access this non-recurring aid, is unfortunate.

The expenses generated by the temporary State contribution to the uncovered costs of certain companies (a measure voted on in mid-December) are estimated at 125 million, while the implementation of new stimulus aid benefitting certain companies will cost around EUR 60 million.

This aid, whether refundable or not, as well as moratoriums, postponements and other loans, probably helped to avoid an increase in the number of bankruptcies in 2020. With 1,199 bankruptcies in 2020, this number even decreased by 5% compared to 2019. We have yet to see if State measures could further delay, or even prevent an increase in, bankruptcies in 2021 as well. To achieve this, the aid would have to cover all of the uncovered costs of businesses; the European limits on state aid would have to take into account, where required, a necessary extension of national instruments or conditions for accessing bank loans that are not more restrictive against the backdrop of new regulations across the board; there would be an increase in the proportion of non-performing loans, and significant exposure of banks to the sectors most affected by the crisis; etc. Many prerequisites, which could increase in the event of a prolongation or escalation of the economic crisis.

It is also important to think about the liquidity and solvency of businesses, which is why it will eventually be necessary to transform certain debts into equity and to make some debt write-offs to prevent bankruptcy and to provide companies with the capacity to bounce back in the recovery phase, by innovating and investing.

In general, we can say that Luxembourg has succeeded in implementing a relatively significant arsenal of aid, first generalised, then more targeted, for the most affected sectors, especially in comparison with certain Member States in the eurozone. This said, considering the amounts actually allocated, there is still room to implement additional aid, until the end of the pandemic. Compared to the amounts announced by the Government at the start of the pandemic and in comparison with the funding of other economic, social or environmental policy measures, as it turns out, the aid allocated so far has been reasonable: each year, the Bëllegen Akt tax credit to lower the fees of purchasing a home costs the State 200 million; the exemption from capital gains on the sale of a main residence 190 million; and the professional deduction 87 million.

Resilience, productivity and confidence: The other key words for 2021

In the end, the overall cost for society of the arsenal of aid to businesses and employees (in terms of partial unemployment) is much lower than the societal cost of the disappearance of large parts of our economy and jobs and tax related revenue. Still, the impact of the crisis on public finances is considerable, with a public deficit of 5% in 2020, which could be reduced to 2% in 2021. Statec’s optimistic scenario even suggests a return to equilibrium in 2021… a situation that is much more favourable than in other European countries (and which should come from better economic health and not from underinvestment in stimulus measures…). Healthier public finances than in most of the other eurozone Member States have enabled the Grand Duchy to deploy an anti-cyclical fiscal policy during this crisis, marked by a proactive approach to public investment spending and aid allocations to businesses and households.

This Keynesian policy can help create the basic conditions for a resilient, competitive and pro-business environment that supports businesses to regain their pre-crisis growth potential and encourages a successful sustainable recovery for the economy.

From this moment on, it is necessary to rebalance public finances and rebuild reserves, in particular through a policy of reviewing current expenditure and State operations (abolition of unnecessary procedures, increased use of digitalisation, continuous optimisation of services for the public, …). So ,in parallel with the continuous and prolonged deployment of rescue measures and resilience initiatives, the Government and private actors must now prepare together for the recovery phase. As ever, the key words in this context, which I have previously mentioned, are digitalisation, administrative simplification, and the continued diversification of our growth sectors (finance, industry, logistics, ICT, etc.). The pandemic is tending to relegate our country’s structural problems to the background: housing, spatial organisation, energy transformation, availability of skilled labour, financing of social protection schemes, stagnant productivity, etc.

This last point of concern should continue to lead socioeconomic discussions after Covid.

Indeed, Luxembourg’s sluggish productivity was already an issue long before the arrival of Covid-19. What impact will the crisis have on this? While we can speak of a rapid and marked technological leap in the organisation of work through digitalisation and the development of teleworking, the link between the latter and productivity remains uncertain. It is difficult to confirm whether teleworking will have a positive impact in this area, especially in view of the negative effects resulting from the prolonged lack of social contact, human relations, creativity, etc. In addition, other factors are more worrying concerning the evolution of productivity: the under-training of employees during the Covid period, the impact of distance training on pupils, students and academics, the increase in inequality, the risk of chronic underinvestment by companies, delays in deploying new technological innovations, etc. Productivity is therefore likely to be the next ‘patient’ of our economies.

Less tangible and more difficult to influence, confidence will nevertheless be an essential element of the recovery. The significant potential for an upturn in consumption could be eroded by a deterioration in confidence. According to Statec, private consumption fell by 6% in 2020. Following the administrative lockdown, the decline in consumption was particularly significant in the second quarter, due to forced saving. The capacity to bounce back, supported by intact purchasing power (except for unemployed households in particular), high savings and consumption deferrals, turns out to be highly variable depending on the product and could be slowed down by a concentration of savings among high income earners (whose propensity to consume is relatively lower). The ‘over-saving’ compared to a ‘normal’ year, which we could also qualify as ‘enforced’ saving, will have been around EUR 1.3 billion in 2020. It will therefore be a question of mobilising this money so that it re-enters the economy circuit, via consumption within local businesses and stores. If not, the risk of chain bankruptcies could be further increased.

Vaccination strategies: Many decisions to be made quickly

Ensuring that the public, consumers, suppliers, entrepreneurs, creators, investors, etc. regain confidence in 2021 will depend above all on the ability of countries to vaccinate a large part of the population against the virus (various studies suggest that a vaccination rate of 70% to 80% of the population is necessary to ensure immunisation), to allow a return to a ‘new normal’.

If resolving the problems in securing vaccine supplies at European level seems (too?) slow, there is still the question regarding obligatory vaccinations, which can be necessary to travel to certain countries (e.g., the vaccine against yellow fever in some African countries…). Here, several schools of thought on possible procedures clash, namely: obligatory up-to-date vaccination passports; obligatory vaccinations for benefits, services, and certain authorisations; optional vaccination based on the hope that the immunisation rate of the population will be reached quickly; etc. Luxembourg, like many other European countries, seems to fall into the latter category.

At the microeconomic level, many questions arise in terms of labour law, work organisation, establishment of new business plans, adjustments of marketing strategies, etc. What solutions do companies want to adopt in terms of their clients, their employees, their suppliers and other stakeholders? Could or would airlines, companies in the Horeca sector and events, travel agents, etc. reserve certain services or benefits for vaccinated clients? Will entrepreneurs and the self-employed from other sectors be called upon to launch new concepts and business plans favouring vaccinated people, or, perhaps, flexible solutions, adapted to each case?

These questions are delicate from an ethical, human and societal point of view, but also from an economic point of view, with underlying considerations of profitability, marketing and business strategy, likely to generate polarising discussions and debates, on social networks and elsewhere. They require well thought out, brave and quick decisions.

The year 2021 will be decisive in more ways than one, but also a year of sometimes difficult decisions by economic and political decision-makers. It is to be hoped that the debates leading to these decisions can be conducted calmly, without excessive polarisation and controversy. Factual and scientific analyses, and balanced and weighted considerations that take into account aspects of both human and economic health should guide decision-making by those in charge. Decisions must be explained in an educational and clear manner to the public, through coherent and transparent communication and awareness-raising processes.

All this can be accomplished in a more calm and straightforward way if vaccination strategies can be deployed quickly and awareness-raising campaigns can convince hesitant citizens of the benefits of vaccination. Indeed, if we can quickly reach the vaccination rate required to ensure sufficient immunisation of the population, decisions about vaccination strategies and life after Covid will be that much easier.

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