Is stopping corona support such a good idea?

Published on: 3 March 2022

Current issues in the fields of the economy, (responsible) investment, pension and income: every week, an APG expert provides a clear answer to the question of the week. This time: macro-economist and senior strategist Charles Kalshoven about the end of corona support and its consequences. Doesn't the end come too soon?


As of April 1, the government will stop offering corona support. This means employers can no longer make use of, among other things, the Emergency Bridging Measure for Employment and deferral of tax payments. Apparently, they are no longer needed. After all, entrepreneurs can now do business without restrictions thanks to the relaxation of the corona measures and the positive economic outlook, the government reports in a news item. Kalshoven also believes that the abolition of the support packages comes at a good time from an economic point of view, although the situation in Ukraine makes the prospects somewhat more uncertain. "When you walk through the city, you see 'people wanted' signs everywhere. So the economy is doing well, resulting in major shortages in the labor market."


Zombie companies
According to the economist, reversing a measure is always difficult but in this case, it is necessary. "They say there's no measure as permanent as a temporary measure. Think, for example, of the French toll roads or Kok's quarter: measures that ultimately turned out to be more permanent than temporary. Significant measures were needed in this case to prevent corona from hitting the economy significantly. But at some point, those measures must be reversed. For example, the Netherlands Bureau for Economic Policy Analysis argued about a year ago to stop the support because it would prevent the transition of the economy. Instead of letting employees of financially unhealthy companies sit at home paid, you want them to work in more promising sectors. The so-called zombie companies then go insolvent while their employees can be more productive elsewhere. That's how it works in a normal recession. But this recession was abnormal. And there has been no transition due to the support measures."

The number of corporate insolvencies is therefore still very low. "That is partly thanks to the corona support, which was aimed at all employers, financially healthy or not," says Kalshoven. "In a normal recession, insolvencies skyrocket. But this was more of a kind of artificial coma of the economy, in order to fight corona. A year ago, we were still afraid of a wave of insolvencies but fortunately, this hasn't happened so far. This may also have to do with the fact that people have been able to save for a long time and now like to spend that money, for example in the catering industry."

Investors consider the chance that a company will not be able to repay a loan is more likely than before

Back to normal
Even if the number of insolvencies is not rising yet, investors are now clearly taking this more into account. The interest on corporate loans is rising faster than the interest paid by creditworthy governments. The difference is the credit spread, which is growing. And you can partly see that spread as an insurance premium, in the event no repayment is made or is made too late. Investors demand a fee for this. The rising credit spread is a worldwide trend, Kalshoven points out. "It was very low, and is now rising to normal values again. This means investors consider the chance that a company will not be able to repay a loan is more likely than before, and therefore demand more interest on corporate bonds." That's a direct result of stopping corona support. The higher credit risk spread also has a monetary cause. "Central banks are withdrawing from the bond market and announcing rate hikes. Those are signs we're going back to normal."

Consumer confidence
Could the war in Ukraine still affect the positive economic outlook? "That's very difficult to predict. If Russia turns off the gas tap or we say we no longer want Russian gas, energy prices will rise further and the availability of gas will be jeopardized. This could have consequences for greenhouse horticulture and industry, for example. And also for consumer confidence. If gas and petrol remain expensive or even rise in price, we will be hit in our wallets. Perhaps there will be economic support again, this time in the form of a war package." 

If such a support package is needed again, due to the conflict in Ukraine or a new corona outbreak, it is fairly easy to set up such a package again. "The bottleneck isn't whether you can implement it quickly, but whether you as a government have the resources. In the Netherlands, the national debt has increased as a result of the corona support packages, but it's still not that bad. In other countries, the national debt is much higher. Although you may also wonder what is high in this case. What matters is whether the market thinks a country can repay its debt. When corona struck, the European Commission bought up debt securities from EU Member States. This created market confidence in European bonds and more unity in Europe. That unit seems to have grown even larger by the Russian invasion of Ukraine. As a result, I think that a lot is still possible in terms of European support measures, if that turns out to be necessary."