Thread by @MoecGilles

Assuming our economies continue to normalise fairly swiftly (which in Europe remains the likely scenario) fiscal policy should shift from emergency “carpet bombing” offsetting the collapse in supply to long-haul demand management 1/11

However industries/businesses were not equal in the face of the lockdown and some of them will need specific protection for long. This is triggering a debate on over-protection/zombification. We think however that sectoral support is part of demand management. 2/11

The new long term part-time unemployement scheme unveiled in France will offer up to 2 years relief to badly hit firms through up to 40% working time reduction subsidized to the tune of 80-85% by the government. More than 25% of their employees pay would be socialised 3/11

This could impair “creative destruction”, i.e the reallocation of labour and capital from the least productive sectors to the most productive ones, depleting potential growth. But we don’t think this applies to our current situation 4/11

Lockdowns do not follow economic logic. They have profoundly affected perfectly viable and productive firms. Allowing them to be “wiped out” could actually deplete aggregate productivity. 5/11

Labour reallocation is a messy process at the best of time, in particular because of skills mismatch across sectors. It would be even worse at the current junction because even “strong” sectors faced with low demand prospects will hesitate to hire more 6/11

Allowing a quick “release” of employees from the worst-hit sectors to an already depressed labour market could trigger a negative spiral on demand, with precautionary saving sky-rocketing 7/11

And the fiscal cost needs to be assessed in net terms. With an average replacement rate of unemployment benefits at 70% of the previous wage in France, avoiding 1 full job loss would financially justify 2.8 APLD beneficiaries. 8/11

It is a fine line of course between over and under protection, but the Schumpetarian approach looks particularly risky in our current environment 9/11

Full weekly musings here 10/11 axa-im.com/content/-/asse…

And Podcast version here (warning: don’t listen if you are allergic to English/Australian singers with a falsetto voice) 11/11 smartlink.ausha.co/macrocast/14