Have furlough schemes in Europe worked?

When the Coronavirus pandemic first raced through Europe, forcing Governments to take draconian lockdown measures across whole countries, the impact on people’s livelihoods was felt almost immediately. In reaction, governments took a variety of measures to limit the full force of the virus on their economies.

One of the most common ways that many developed European nations took was to implement schemes that supported workers’ wages if they would otherwise lose their jobs due to a downturn in business caused by the lockdown.

Here, in this article, we examine Germany, Britain and France’s schemes while questioning their advantages and disadvantages with a view to analyze their effectiveness, both now and for the future when support is taken away.

France’s Coronavirus Furlough Scheme

France’s income support scheme is called the Chomage Partial. It is thought to have cost the French government upwards of €26billion this year already. It has been put in place to support the millions of workers affected by the coronavirus and it has therefore been accessed by over 12million French citizens.

It is one of Europe’s more liberal schemes as it offers workers up to 70% of their salaries, which can equate to almost €7000 a month (gross). If a person is on the minimum wage, they can receive 100% of their wage through income support from the government. What’s additionally good about this scheme, in addition to the direct financial help and support of employees, is the fact that companies can also claim just a small portion of a worker’s wages as opposed to all. This means that the impact on the government’s balance sheet has been lessened as costs are minimized by allowing workers to work part time.

The disadvantage to the French scheme, despite how extensive it is, is how the country foresees stopping it. It is hoping to cease Chomage Partial by September. With the danger of a second spike looming while infection rates do not fall at the speed with which France’s ministers hoped, the easing of lockdown has not been as quick in France as the government would have liked. Plus, the aftershocks of the lockdown will be felt for a while yet as negative demand ensues and productivity is still lower than that of pre corona times. The issue with France’s extensive job retention scheme therefore is that while it has stopped the country’s economy from sinking completely, how long can it really keep it afloat as well?

Germany’s Coronavirus Furlough Scheme

Otherwise known as the Kurzarbeit, Germany’s furlough scheme is one of the most generous in Europe. It pays workers’ wages up to 67% of their net salary that has been lost to shorter working hours. In fact, workers can claim up to €6,700 if they have children. If they don’t, they can claim up to 60%. The scheme is helping over 10 million citizens that have been affected by the virus and lockdown.

In all, this support of wages is a package that was expected to cost the German government over €10billion when it was introduced. It is now thought that this figure could actually rise to a huge €40billion, if not more. Whilst lockdown is currently easing in Germany, there are also a number of spikes in infection rates that threaten the country’s ability to open its economy fully.

Nevertheless, while the cost of the scheme looks to be escalating, that shouldn’t detract from the advantages of the package. The government had already used this scheme during the financial crisis to help workers who were then negatively impacted by job losses or shorter hours. This meant they could roll the scheme out again very quickly. Additionally, though the banking crisis only affected certain sectors of the economy, the coronavirus crisis has hit many more. Kurzarbeit has been able to help many by protecting income and therefore aggregate demand as a result. Plus, as workers do not get laid off, companies save money on the rehiring of employees when demand picks up – which it is expected to do very quickly.

The problem with this scheme – which the IMF refers to as the gold standard of income protection schemes – is actually just how good it is. There is a worry that the German government is intervening in the economy too much. Given that many parts of the economy have now reopened, there is concern that employees don’t have the right incentive to return to work. Currently, it could be the case that the government is paying some of its citizens not to work at all.

Britain’s Coronavirus Furlough Scheme

Britain’s furlough scheme surprised many by being as supportive as it is. The chancellor announced that its job retention scheme would pay 80% of a person’s gross wages up to a value of £2,500 a month. Due to the extent of the coronavirus lockdown, the scheme was accessed by 1 in 4 workers at its height. Initially, it was to be rolled out until August 2020, but it will now come to an end in October. Firms are being asked to contribute towards the scheme now that parts of the economy are able to reopen tentatively with lockdown measures being eased slowly around the UK.

One of the biggest disadvantages to the UK’s scheme was the fact that if employees claimed on the furlough scheme, they could not work at all. This precluded them from working even part time, which has obvious impacts on productivity that could have been. The government amended this however and employees can now claim on the scheme whilst also working part time.

The price of the initiative has been vast and has cost the UK government £14billion a month. It is now closed to any new applicants and it also does not make allowances for different parts of the economy. The chancellor has come under fire for this approach given that some sectors have been far harder hit – like hospitably – than others and arguably would need government support for far longer in order to survive.

Income Support And Job Retention Schemes – The Bottom Line

While none of the above schemes are perfect, there is no denying that the impact on economies would have been far worse without them. However, with no vaccine as yet certified and the virus still raging in parts of the world, the true impact of COVID19 on economies is yet to be fully understood.