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COVID-19 Crisis: Is There A “Vaccine” Against The Economic And Financial Version Of The Virus?


An exclusive interview in the form of 19 questions with Pierre V. Pereira da Silva, Grouplunch General Manager – and economist – on the imminent risk of a major economic crisis in the Grand Duchy and how to prevent it.
by: Silicon Luxembourg
photo: Kaori Anne Jolliffe
featured: Pierre V. Pereira da Silva

Listen to Q&A n°1


You are the general manager of Grouplunch, a company that delivers meals to companies prepared by restaurants you work with. Since you mainly serve offices, how does this lock-down situation affect your business?

We have been severely affected. Our sales have fallen by 85%. And operating in the logistics sector, our fixed costs are quite high. That says it all. The current situation is very difficult for us, as it is for our partner restaurants with whom we work, but also for businesses and even medium-sized companies with whom we have been able to discuss the problem. We have no idea how long this will last and so, like everyone else, we are very worried.

Only about a quarter of our restaurant partners are still open to carry out food deliveries and offer take-away orders for their clients (there is a ban on serving clients in their restaurants). But they are operating at a loss, just like us and just like La Provençale too for example. They, like us, are currently rather in a movement of solidarity towards those who take risks to keep the country running in these times of “war”, those who have no choice other than going to work, and also not place to eat. In a way, we are no longer in the “business” sphere.

Our main objective remains to ensure the continuation of our service, which we now consider to be an essential service to the population, while intensely developing new ranges of services that will also be useful and in demand during this period of shutdown. To survive, to be useful and to innovate as much as possible.


Listen to Q&A n°2


You are in contact with dozens of restaurants that work with Grouplunch. Have you had any feedback on how they experience this abrupt shutdown of their activity?

Yes, intensive feedback. The situation is simply catastrophic.
All of the restaurants with which we are in contact, alerted us on the fact that they have they have significant liquidity problems, which are really jeopardizing their business. There are also large groups with many restaurants and hundreds of employees which fear bankruptcy in just a few days. The situation is extremely serious.

The German restaurant chain Vapiano declared insolvency last Friday. It is in a way “the first of the big ones” to go down. And Vapiano is also present in the Grand Duchy.

We can expect an unprecedented wave of bankruptcies in the coming weeks in the Grand Duchy if certain immediate and very significant measures are not taken. These measures to be taken are very different from those announced so far by the government (which by the way have not yet been implemented, operationally speaking).

And I am not only talking about restaurant owners, but also about shops of all kinds: butchers, bakers, organic shops, florists, etc… And also small and medium-sized businesses providing goods and services to these heavily impacted businesses.


Listen to Q&A n°3


On what basis do you consider that businesses and small and medium-sized businesses are also in difficulty?

As part of the urgent development of our new service to compensate for our loss of business (for example, a new online ordering and delivery platform for restaurants & shopping “FOOZO.lu” which will be operational in a week’s time), we are in daily contact with all types of businesses, beyond restaurants (as mentioned above, from butchers to florists, cheese makers, etc.). Here again, the situation is terrible in terms of cash flow.

The stockpiling of groceries and supplies by private individuals who have gone on the attack of the big stores has been truly catastrophic for a lot of small ones, who have been on top of that logically forced to stop their operations abruptly following the government’s decision to shut down the country.

The hypermarkets, large chains, etc. accumulated one or two months of income “in advance” of their normal turnover, and the restaurants and most of shopkeepers lost exactly the same turnover symmetrically, without even having time to understand what was happening to them. Only in a few exceptional cases, the opposite occurred.

If the opposite had happened, it would have been the restaurants and merchant’s stock that would have been solicited, just before the obligation to stay home was decreed. This would have been the ideal scenario for them: No stock spoiled, treasury sufficiently reinforced to last until the economic support measures come into force.

In the rush, customers went “as convenient and quick as possible” to supermarkets where all types of products are concentrated. We can’t blame them, it’s a human protective instinct. But the result is catastrophic at the level of local commerce.


Listen to Q&A n°4


What you’re saying is disturbing. You are suggesting that a chain of bankruptcies could quickly occur in Luxembourg. Are you certain of that? In the case of Vapiano, for example, it seems to me that the company was already experiencing financial difficulties.

This is quite right, and you are right to point this out. Nevertheless Vapiano is still a concept which has proved to be successful from a commercial perspective, and we must not forget it is an international group with more than 10,000 employees and more than 230 restaurants around the world. In normal times, a group of this size has time to organize itself to turn things around.

Two questions arise: Was Vapiano’s situation already fragile? The answer is yes. Is the fact that this insolvency is happening now a mere coincidence? The answer is no.

In other words, the triggering event is indeed COVID-19, and the cash flow disruption it generated at the level of this group – a group which indeed did not have a healthy enough financial situation to absorb the shock internally.

In normal times, a bankruptcy/insolvency process starts with a company’s economic problems. Issues like progressive loss of market share to competitors, poor business model, insufficient profitability, poor management, etc. which then at some point turns to insufficient treasury as revenues are not sufficient to cover costs. And if no financing or capital injection is possible, cash flow issues begin, payments delays, etc.

In the situation we are currently experiencing, the logic has been reversed. The cash flow issues come first, suddenly, and are due to a factor that is fully exogenous to the economy (a public health issue). And the treasury of various “healthy” companies is currently melting like ice on a summer day (Grouplunch is no exception).

The impact of the total shutdown is enormous, because in these badly affected sectors, even well-managed companies do not have one- or two-months’ cash in advance.


Listen to Q&A n°5


Nevertheless, the government has implemented measures, including the acceptance of the introduction of partial unemployment for reasons of force majeure, tolerance of delays in the payment of social security contributions, VAT, advances on taxes, and above all the introduction of a partial guarantee from the Chamber of Commerce to cover emergency loans to be deployed by banks.

This is true, and fortunately these measures have already been implemented quickly. Unfortunately, however, they are largely insufficient.

As far as technical unemployment is concerned, it all depends on when these salaries will be reimbursed by the government. We need to shorten the delay as much as possible, ideally transferring these resources immediately to the companies, at the time when employers have to pay their employees’ wages, i.e. now before the end of the month. Literally, in the next few days. Unless I’m mistaken, I don’t think it’s planned in this way (or at least we haven’t been informed of it). For the State, advancing this treasury is no problem at all. But for hundreds, if not thousands of companies, it could make all the difference.

Certain other measures will, it is true, have a guaranteed immediate effect. For example, social security contributions, VAT advances, etc., which should be paid in a few days, can be postponed without punishment. But that is a very small part of a company’s costs. And it is not an exemption, so it is a simple deferral of the problem.

Financial outflows are mainly related to the payment of salaries, rent and suppliers. For these three categories of costs, the only “emergency assistance” proposed by the government is the obtaining of a guarantee by the Chamber of Commerce, at a level of 50% of any emergency loan contracted with the bank (with a ceiling of 250,000 Euros).

It is indeed very clever to go through the banks, as they already have access to their clients, and they have people who can work on these cases at a time when the state services are overwhelmed.
The banks are thus in the best position (from an operational point of view) to irrigate the economy quickly and efficiently and avoid the cascade of defaults that is looming.

But which banker is currently allocating a loan that includes risk for the bank (even with this risk reduced to 50% by the guarantee of the Chamber of Commerce)? A bank employee who would do this to favor economic actors (his clients) would risk losing his job in a month or two. A potentially suicidal action, so to speak. That’s not going to happen.


Listen to Q&A n°6


So you think the banks aren’t going to do their part?

There are no good guys and bad guys. We need to understand the gravity of the situation and get to the heart of the matter. The “risk management” notion is simply no longer rational these days, as we are facing a threat (COVID-19) that we don’t know when we will be able to control it. There is no longer any reference to what is risky or not risky, because no one has a crystal ball.

A bank doesn’t know at this point in time whether its client will have to stay closed for a month, two months, three months, six months, a year, or more. If his client’s income will be zero for that indefinite period, or the client will restore 30% or 50% of his figure in three or six months, for example.

Lending to his client to cover one or two months of operating costs, knowing that he might still be insolvent in two or three months, would be inconsistent in terms of risk management. A bank will only grant a loan if there is no risk involved.

In practical terms, this means that for the other 50% not covered, it will ask for an equivalent collateral from the client. Funds from the client, blocked in benefit of the bank, at a time when cash is no longer there.

If one really wants to help companies, then this collateral from the Chambre du Commerce has to be full (100%) so that neither banks nor clients are afraid to contract this help. There is no other option.
These are very serious times and the State must make itself available as a “lender of last resort” to guarantee the liquidity of the economic system, which it has suppressed via a major political decision to shut down the country.The decision was absolutely
necessary from a public health point of view, no doubt about that.

The decision was absolutely necessary from a public health point of view, no doubt about that.

Nevertheless, we would then expect our government to step up and stand by the individuals or organizations heavily affected by that decision. By announcing that it won’t be able to support all companies which have been heavily compromised, the government is doing exactly the opposite of what we expect from leadership. It is also doing the opposite of what all world leaders are doing. It is very difficult for us to understand that position.


Listen to Q&A n°7


You seem very pessimistic about the situation, and how the supporting policies are being put in place. Do you think the government is not doing enough?

The Luxembourg executive, like all the other governments in the world at the moment, is working hard and doing its best to mitigate the effects of this crisis that has hit us all at once. The decision-makers currently have the health issue to manage, which is and must be an absolute priority, and then the societal and socio-economic issues that derive from it. I cannot even imagine what a government official’s day looks like today.

However, the risk precisely is that we do not take the time to consult the economic players, to obtain their feedback, to accurately prioritize what the main threats to the real economy are, so that we can realize the extent of the consequences that we risk, so that we can implement the most effective measures possible.

The guarantee provided by the Chamber of Commerce, for example, goes in the right direction (facilitating liquidity).

However, with a guarantee limited to 50%, it will be only marginally deployed, for the banks’ risk management reasons already mentioned.
If a measure is developed ultimately to promote credit and avoid payment defaults, and the result is that in the end there is no credit deployed, or very marginally, then it is a bad measure. It is a bad measure in the sense that it does not achieve the desired effect (stop the bleeding).

We need to realize this kind of issues before defining the tools, in order to be one step ahead so as not to waste time and resources.

It is a bit as if the government’s containment measure was only 50% applied. Widespread infection of the population would still occur. That is how, when the situation is very serious, sometimes the measures must be applied 100% or they are simply ineffective.


Listen to Q&A n°8


We have the impression that, beyond the issue of health, there is little coordination of action between the governments of the various countries, certainly because of the urgent day-to-day management of internal affairs.
In addition to the health side, wouldn’t more coordination also be necessary in economic matters, as was the case during the 2008-2009 crisis when the majority of Central Banks and governments ultimately acted in concert?

Absolutely. A nationalist approach in treating the crisis would be a major mistake. But it is also difficult to talk about international coordination now, when we spend all day putting out fires at home.
To imagine this, imagine how counter-intuitive it is to think about going to help your neighbor to put out a fire in his house when there is a fire in your house too… And also in all your neighbors’ houses!
You look out the window and you see all the houses in the neighborhood in flames, what do you do? You take care of yours first. That’s a bit like what we’re going through right now.
It is somewhat understandable at first, although we will have to change our stance very quickly if we want to avoid the worst on a global scale – whether from a health or an economic point of view.

I would say that the fact that governments are “observing” each other is already very positive in the current context. There is a kind of ripple effect, and I notice that thanks to this governments are not afraid to take the necessary bold measures to preserve the economy, for which they could be judged in normal times. This is not “cooperation” in the literal sense, but in times like these, let’s already take this common impetus as something very positive.

Luxembourg must take this momentum on board as well. This is not the case at the moment.


Listen to Q&A n°9


It is true that before managing Grouplunch, you worked for several years in the financial industry, and before that as an economist. Can you detail what kind of crisis and therefore risks do you think we are facing?

I sincerely think that we have simply never experienced a crisis of this type in recent history. Like COVID-19, it’s simply an unknown version, a new species if you will.

There have been supply and demand crises in the world in the past. If you take into account the global nature of it (the whole world being affected simultaneously), the closest case to what we’re getting into now – in my opinion, in recent history – is the oil crisis (which had two waves and two peaks, in 73′ and 79′).
Now, this oil crisis was first and foremost a supply crisis for geopolitical reasons (whose resolution depended above all on us humans). Moreover, world trade flows of goods were about five times lower than their level today (I mean pre-COVID 19), and those of capital, much lower still.

This current crisis of COVID-19 represents a pure crisis of demand, which no manipulation of economic policy adjustment variables can mitigate. It is a sudden cancellation of an entire section of the economy, which must remain “still”, as it were, knowing that this entire section of the economy has links with other economic sectors (less affected for the moment, but it will also come via a much faster contagion effect than one might think).


Listen to Q&A n°10


But we have still seen almost simultaneous action by the ECB and the FED this week. Don’t you think this is a good sign, that there is coordination?

Absolutely. The World Central Banks have really led the way, by acting on the problem – for now, because the problem is very likely to grow.
But to understand that they have also been surprised by events, you only have to look at the sequence of recent actions of the FED and the ECB. First, they deployed “lighter” measures, but these measures became obsolete in less than 48 hours and the very heavy artillery had to be rushed out by these institutions.

At the Luxembourg level, we need to reverse this logic, and start acting in anticipation of the worsening of the situation, because this worsening of the economic situation is going to progress at a very rapid pace, just like the contagion by COVID-19.
So far, in terms of economic policy, the Luxembourg Government has not been acting in anticipation at all, and therefore it is still lagging behind. It is bad for the economy, and
bad for the government in terms of communication.

Once again, it is not a question of effort or commitment. It is a question of perspective. We have to change perspective, right now. This virus shows us day after day that its capacity for harm is greater than we previously thought, so we must constantly be able to reassess our perspective. There is no shame in that.


Listen to Q&A n°11


What do you mean by “change of perspective”?

The whole challenge of defining economic policy in the current situation is to “think out of the box”, because the logic is completely new.
The period we are living through is a real test for all kinds of leaders on this planet. In practice, absolutely everyone has to question themselves and change their perspective. Leaders from the private sector, the public sector, executives of all kinds, community leaders, and others.

Can you imagine the responsibility of a community leader in a slum area of Rio de Janeiro (the city I come from), one of the most densely populated places on the planet, in times like these?
In normal times, this leader organizes sports and cultural activities for children with teams of volunteers. There, suddenly, his reading of the threat of COVID-19 and his ability to convince a very poorly educated population, his community, to respect the rules of social and sanitary isolation can literally save tens of thousands of lives.
He suddenly becomes a warlord, whereas it is basically a volunteer worker.

Any member of the Luxembourg government should now see himself as a war leader, whose mission is above all to protect his soldiers. And the sooner he puts on this costume, the more effectively he will be able to achieve his main objective: To protect his troops in order to get through the crisis with as few casualties as possible.

Prime Ministers all around the world must protect their respective populations and minimize the loss of human life. Health ministers must protect their medical teams to ensure that they can work in the best possible conditions and minimize the loss of life among medical teams and in fine, among the population. And the ministers of economy and finance must protect the economic and financial system in order to minimize casualties among business. This is the job of all leaders today: Survive and preserve. We will all be judged on that, let’s forget the rest.


Listen to Q&A n°12


How do you think the cash flow issue should be handled? You mentioned 100% secured loans instead of the 50% implemented, is this the solution?

Moving from a 50% guarantee to 90% or 100% coverage of the loan is a first solution, which needs to be implemented immediately. Germany’s “COVID-19 economic package” defines this proportion of the guarantee at 90%. We should be inspired by it, Luxembourg should increase this guarantee to at least 90%, ideally to 100%.
Germany will probably regret in a few days’ time not having set this guarantee at 100% instead of 90%. The banks are generally in a state of complete panic, and on top of that the German banks are doing rather badly at the moment. So in the current context, even at a risk level of 10%, they will still not like it.
They will probably limit themselves to financing the top 10% or 25% of their clients who present the least risk, and that’s it. So the majority of the problem will persist and cascading bankruptcies will probably still occur there.

Having said that, even if we duly put in place what I call “emergency credit”, we also need to have a full understanding of what that means:
Taking on credit to solve a cash-flow problem is equivalent to jeopardizing the future, especially when we don’t know the ultimate extent of the issue. In short, it means shooting yourself in the foot, with the sole aim of surviving. It is not the ideal solution.


Listen to Q&A n°13


So do you consider increasing debt to be a problem?

An increase in debt in itself is not a problem. If as a business decision-maker, I take on debt in order to develop a project that will allow me to reach new markets, knowing that these new markets will generate future income, and that the cost of my borrowing is less than the discounted financial return on that future income, then it’s a good decision, and the debt is positive.

Now, if I borrow to pay salaries today, thinking that next month I will borrow new funds to continue paying salaries, rents, fixed costs, etc., then it’s not a good solution at all.
It’s a kind of “desperate solution” that the majority of businesses affected by the crisis will certainly follow, if they have this possibility and no other choice.

This nevertheless creates a general postponement of the problem, which is on top made worse. For the financial position of all these companies will be further deteriorated in a month’s time (due to additional debt for non-productive reasons), at a time when – unless there is a miracle – a normal socio-economic context will probably not yet be restored.

The facilitation of this credit is therefore also a trap both for companies and for the government.

We also must consider the European context in which Luxembourg’s economy is inserted. Due to the accommodating monetary policies of the last ten years around the world and the fall in interest rates, the corporate world (outside finance) is already hyper-indebted in the European Union. Further indebtedness of the European private sector, in a context where income no longer exists for a period of unknown duration, is not advisable.


Listen to Q&A n°14


If I understand correctly, 100% secured credit would therefore not be the ultimate solution. In your opinion, what would be the ideal solution in this case?

The ideal policy would simply be to give (free of charge and without compensation) to the companies affected by this crisis the amount of their sales that has been taken away from them suddenly and without prior notice, due to a factor that is totally exogenous to them. This is in order to immediately ensure the liquidity of the economic system and avoid the first bankruptcies, because once a chain reaction has started, it is much more difficult to stop it and reverse it. A grant, to replace the liquidity taken out from the system.

I know that this idea seems a bit crazy at first glance, but it is quite simply the least expensive and most direct way to proceed (and therefore the most efficient in the end) in this case that we are experiencing.

This concept already exists in a theoretical form, called “helicopter money”, which is self-explanatory. This concept was created in 1979 by the Economics Nobel Prize winner Milton Friedman.

The only variation I would recommend from the original concept is that, instead of randomly throwing money out of a helicopter, funds should be distributed according to qualitative and precise information on the abrupt loss of income incurred by the various hard-hit players in the economy (in order to avoid misuse of public funds).

It is much simpler to put in place than one might think at first glance, both in terms of gathering information and deploying funds. Of course, we have to sit down with the banks; they will have a fundamental role to play. They have access to the companies’ accounts. So both sides could be covered by respected banking institutions (cash flow analysis and deployment), and it’s totally auditable by the government, via the said banking institutions.

Of course, in case of fraud, lies, etc., those responsible would be held accountable. And, obviously, all other aid should be withdrawn at that point (partial unemployment paid to companies, etc.). All that is required is to adjust the amounts, make deductions, etc., so that there is no duplication and so that public money is properly deployed. The banks can play this auditing role, they will do so. Because they do not want to see their clients going out of business either.


Listen to Q&A n°15


This rather heterodox approach would probably be unprecedented. Wouldn’t the implementation be equally complicated, politically speaking?

As far as I know, yes, it would be unprecedented. But when faced with a new problem, a new solution is needed.
And yes, there is a political challenge, but it is surmountable. The challenge exists at two levels: at an internal level and at an European level.

At the internal level, the “liberal” label that will be put on this approach will have to be overcome, as the government of is composed of several political forces. Nevertheless, the attribution of this liberal label would be a mistake.
Indeed, if from a “monetary policy” point of view, the approach appears economically liberal at first glance, it is not. For the sole purpose of this measure is to preserve the multitude of small and medium-sized players that make up the base of the Luxembourg economy, and its related jobs. It is therefore first and foremost a measure that is quite left leaning.
The various parties (including the green party) will therefore have to realize that by jointly supporting the approach to save the real economy, they will be defending all their missions and the values of their respective political forces.

At the European level, the challenge is the risk of considering this approach as state aid, and a backlash from the European Commission. This is why it is necessary to have the approval of the European authorities beforehand.
The solution would be to draw up a clear emergency aid plan (much more ambitious than the current 300 Million Euro destinated for “advances & loans” which was approved by the Commission yesterday, indicating the list of sectors concerned by this direct aid, the respective levels of sudden income losses suffered by companies in each sector, etc.
The objective is to demonstrate that there is no “bad faith” or abuse, and that this situation is not being taken advantage of to give state aid beyond what is necessary to ensure the survival of these entities. Income cuts are replaced at their exact level, to avoid a massive disruption of the system.
The approach is therefore a healthy and fair approach that aims to avoid an uncontrollable state of crisis. The Commission will validate. Moreover, the Commission will be able to draw inspiration from it in order to ensure horizontal justice at European level. Luxembourg could demonstrate, despite its small size, true European leadership.

The Commission could decree, for example, that in these exceptional times, any Member State may allocate direct grants amounting in total up to the equivalent of 10% of GDP for example, to its heavily affected businesses (each Member State being free to decide how much, within this 10% limit), for the simple purpose of replacing on a pro rata basis the sudden loss of income due to the COVID-19 crisis (provided that the helped entities preserve employment, and suppress applications for partial/technical unemployment – in order to avoid duplication of grants and benefits).
This would be excellent for the EU, given the current level of EU’s private sector debt. And for Luxembourg, giving its political weight on a European scale.

Obviously, this would take some time at the level of the Commission. Between the preparation of the filing and their answer, maybe one week or ten days.
As we are running against time and the first big bankruptcies are going to arrive there in a few days, it would first of all be necessary to still apply the State guarantee for loans provided by the banking system (with a raise of the guarantee to a level of 90% to 100%) in order to immediately guarantee the liquidity of the economic system (the time to get this proposal to the Commission), while also immediately decreeing a relaxation of the bankruptcy conditions, so that no situation of cessation of payment or inability to honor debts, etc. could trigger an insolvency situation in the legal sense, due to the extraordinary times.


Listen to Q&A n°16


In short, keeping companies alive in a life-support mode would be more economically efficient than letting companies that cannot withstand the crisis collapse.

Precisely. Not because of the fate of these companies themselves (this is not a pity reasoning here) but rather because, once initiated, we do not have the possibility to control a chain reaction effect.
Submarines are built in compartments. Thus, if during a fight a part of the hull is compromised, we isolate the compartment in order to avoid sinking. But the economy doesn’t work that way.
If the situation of the directly exposed companies is a desperate one, the others (less affected) also tremble in Luxembourg. Why is this? Because they economy is intertwined. Right now, every economic system is in its entirety weakened by this situation, whether at the level of Luxembourg, at the European level, or at the global level.

In Luxembourg, I have heard that more than 5,000 companies have filed a technical unemployment file with the Ministry of the Economy. I have no guarantee on this figure but if I proceed by statistical extrapolation of what I hear around me, this figure seems plausible to me.
If we take into account the fact that Luxembourg has about 38,000 companies, but half of them do not have employees (financial holding companies, funds, etc.), it is therefore about a quarter of the “real economy” that is at a standstill (bearing in mind that this figure is tending to rise). Do we really realize what this means in terms of socio-economic impact?
If even 30% of these businesses that are at a standstill go under because they can’t resist months of inactivity without access to credit (and we know they won’t have that credit and opt the way it is proposed now), how many people are we talking about that could end up unemployed? At a theoretical level of 20 employees per company, we are talking about 30,000 people. The number of unemployed people in Luxembourg is about 15,000.
It is clear that the risk of tripling unemployment is a tangible one. Consequently, it must be avoided at all costs, whatever it takes.


Listen to Q&A n°17


How much do you think this general assistance would cost the Luxembourg State?

Based on the measures decided by the United States (package of 2,000 billion USD), Germany (package of 350 billion Euro), etc., the funds they are reserving in order to be able to cope with the crisis represent about 10% of their respective GDPs.
Knowing that in the case of Germany, an additional fund of 500 billion Euro will also be created, which would bring the figure to 25% of GDP. This is very substantial, and it shows how well they identify the seriousness of the problem. Let us remember that Germany is a country that does not like debt.

In the case of Luxembourg, given that a large part of the GDP is not connected to the country’s real economy, we could consider 5% of the GDP in the first instance, or about three billion Euro.
Of course, this does not mean that this measure of “immediate irrigation” of the economic system would cost 3 billion Euro, and the funds would be immediately gone. But this is what the state should be considering at the moment, in order to guarantee the survival of the economy for about three to six months, and for once have a minimum advance on the problem.
I don’t think that the state has such a sum of “free” cash at the moment (free means in surplus, over and above the amounts already earmarked for spending in the budget).
Thus, the government’s treasury teams should already be working on an extraordinary public debt issue right now (knowing that the ECB would buy back immediately).


Listen to Q&A n°18


So you’re recommending that the state goes into debt so that we can fight this period?

It all depends on how much immediate “uncommitted” financial reserves the State has (liquid financial reserves in sum). I have no idea what that figure is, it would be interesting to know. If it is less than four or five billion Euro, the answer is yes.
The State has a moral obligation towards its citizens, it exists to serve its population and not the other way around. It must assume the consequences of its decisions. The decision was taken to close everything down, that decision is commendable, and it took courage.
I myself am personally pleased with this decision, as are all the merchants and small business owners with whom I recently had discussions on the subject, without exception. By respecting the government’s decision, we are all relieved to be part of the containment of this scourge, and to be part of the solution and not part of the problem. But we also believe that the State must assume the consequences of its decisions.

The ECB sent a very clear message to the world last Wednesday evening when it announced the most ambitious debt buyback program in the institution’s history.
750 billion Euro to irrigate the economy and counteract the devastating effect of this total and abrupt halt in European economic activity.
With a public debt of around 12 billion Euro, less than 20% of its GDP, Luxembourg would be making a real mistake not to take advantage of this program.

Luxembourg today has a triple-A rating, which gives it very privileged borrowing conditions. But even if, let’s say, after a year of fighting with COVID-19, Luxembourg would see its public debt increased by 50% in absolute terms (6 billion more debt in one year), it would still be “the best student in the class”, far ahead of the second, and would therefore keep its triple A rating.

Between having a state with an extremely low level of indebtedness and a local economy that is totally dead, or a more indebted state (but still very little debt) with a healthy local economy after the COVID-19 crisis, which do you choose? The choice seems easy to me.

I think there’s also a wrong assessment of the situation by the government. Luxembourg is a very small country, a doubling or tripling of unemployment can go very fast in a context of strong and rapid degradation of the real economy (which is what awaits us if we do not act up to the events).
Such a situation (a doubling or tripling of unemployment) would in fact jeopardize the triple-A rating of the Luxembourg State much more than a change in its debt/GDP ratio from 20% to 25%, in a controlled and deliberate manner (or even to a ratio of 30% if we are talking about six billion Euro in additional debt).


Listen to Q&A n°19


Do you think that increasing Luxembourg’s public debt to combat a temporary problem is not also a bad idea, just as it is for companies?

Of course, the same principle applies, and we must be careful. But again, a pragmatic analysis is needed. We need to understand the principle of relativity of the notion of a country’s indebtedness: debt/GDP.

It is preferable to increase this debt ratio in a controlled and deliberate way “safely” by not letting the COVID-19 durably affect the denominator (GDP), than to worry about the numerator (the absolute value of the debt), by losing control of the denominator (GDP). As an economist, the fact that this is not taken into account by the government is totally beyond my understanding.

Moreover, one has to bear in mind that all European states will borrow simultaneously.
Ursula von der Leyen, President of the European Commission has already announced the activation of the “exclusion clause of the Stability and Growth Pact”, thus lifting the obligation of member states to limit their annual public deficit to 3%.
The result is that all European countries will without exception borrow massively to cope with the crisis (including Portugal and Greece, for example).

In this context, an increase in Luxembourg’s indebtedness will not worsen its position in the sovereign debt market, because in this market, it also works in a “relative” way between countries. In other words, if everyone increases its public debt/GDP ratio by 5% at the same time, nothing will change. The sovereign debt market will still exist, and sovereign debt buyers will still prefer Luxembourg debt, German debt, etc. rather than Portuguese debt or Greek debt. Even if Luxembourg’s debt-to-GDP ratio will have deteriorated a bit (from 20% to 30% for example).


Listen to the conclusion


A word in conclusion?

We can only hope that in the near future a vaccine will be found against COVID-19. While we wait for this happy breakthrough in science to take place, giving us our lives back, we can and must immediately apply the vaccine we already have at our disposal to prevent contagious infection of the economy. The vaccine is known, it is a cash injection. It is within our grasp, and we must take real action before it is too late.

The long-term cost of the collapse of Luxembourg’s small and medium-sized enterprises is far greater than the momentary support cost that Luxembourg is able to give. It is several years that are at risk of being compromised, in addition to a complete potential complete contagion of the financial system, through successive bankruptcies and consequent defaults towards banks.

The only action we can take on the economy side is to immediately put all the “infected of the economy” in intensive care units and quarantine, investing all necessary means to keep them alive, thus avoiding a hecatomb and death of the economic species as a whole.
Curiously enough, the same strategy is actually needed as that used to combat the virus itself: Isolate and protect the most vulnerable and care for the critically ill, in order to keep the health system functional, operational and afloat for as long as it lasts.


The article is sponsored by Grouplunch and reflects only the opinion of the author.

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