Some firms were struggling even before the COVID-19 shock Thus, well-designed liquidity support and employment subsidies can be applied across the whole economy, provided they are effectively targeted in the sense that only those firms negatively affected will participate in the programme. By covering part of the wage bill for unemployed or underemployed staff, there is an incentive for firms hit by the shock to participate in this support scheme, while firms not hit prefer not to do so. Keeping viable firms alive and enabling them to keep their staff makes it possible to quickly restart and scale up economic activities when demand picks up again and supply constraints have disappeared. This also applies to state assistance for the labour costs of a firm (in particular, covering a fraction of the costs of furloughed employees). This implies that firms unaffected by the shock do not have the incentive or the ability to move under the umbrella of a liquidity support scheme. Clearly, liquidity support can then be targeted so that only those firms in need of such support sign up for the support programme. This implies that some sectors need very little to no support, while others are in dire need. It has been documented that supply chain disruptions and demand shocks have had differential effects on sectors (for the UK, see for instance Bloom et al., 2020). Sectors are hit differentially by the COVID-19 crisis While there seems to be wide agreement that government inaction is not an option during the COVID-19 crisis, a few observations may guide the design and revision of state support schemes. Aid should also be effective and proportional to the aims it intends to achieve. State aid can be seen as a response to a system failure resulting from a severe economic shock, either hitting one sector (with possible contagion effects in other sectors) or – as in the case of the coronavirus crisis – simultaneously hitting several sectors.Īs a general principle, state aid to firms and sector-specific support schemes should be used only when there are market failures that is, when there are good reasons to believe that the market would not deliver efficient and/or equitable outcomes. Many countries, including most EU member states, have announced various measures (and are considering new ones) to control the public health crisis and address the economic fallout due to the COVID-19 pandemic. In the current crisis, there are no doubts that state support is necessary to avoid long-run consequences for firms, workers and their human capital.
Governments may also design other support schemes that protect workers or help demand to recover. In such a case, governments have to step in and assist with liquidity support or the appropriate guarantees so that banks and other financial institutions can provide the needed liquidity. Thus, firms that are profitable in normal times face liquidity problems as a result of a negative supply and/or demand shock, and the financial sector does not satisfy the individual needs for liquidity support because of the large macroeconomic risks. However, the ongoing economic uncertainty has made it even more difficult for firms to obtain credit from the financial sector. This has increased the need for many firms to obtain funding. Thanks to COVID-19, markets have disappeared from one day to the next, and firms’ assets in most sectors have been rapidly depleting.