Europe’s strategy of placing tens of millions of workers on paid leave has so far succeeded in stemming the widespread job losses that have been seen in the U.S., but now governments across the continent are grappling with how to wean companies and workers off the support.
The programs were originally intended as a stopgap. European companies idled workers instead of firing them, using billions in state subsidies to cover their payrolls until they were ready to reopen for business. Now that governments have lifted their lockdowns, however, many businesses are calling on governments to keep the money flowing for months to come. The demands are heaviest in industries such as tourism and entertainment, where the virus poses an existential threat.
Catherine Querard, who owns several restaurants and a hotel around the French city of Nantes, is pressing the French government to extend a program that currently pays up to 84% of her employees’ salaries until the end of the year. That would allow her to gradually return her 100 employees to work while implementing costly social-distancing measures.
Ms. Querard at La Guinguette with colleagues Gaylord Huet and David Thibaud, on May 25.
She is expecting restaurants like her flagship La Guinguette, along the banks of the Loire River, to operate at somewhere between 30% and 50% of capacity while ratcheting up spending on hand sanitizer and protective equipment to reassure clientele.
“We’ll have less clients that’s for sure. So that means we won’t need as many employees,” Ms. Querard says. Still, the restaurateur prefers to keep her staff on the state-subsidized payroll in the hope that one day she will be ready to reactivate them all. “We just want to create a bridge.”
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For many governments, the matter boils down to whether they are funding a bridge to nowhere.
If European firms become hooked on subsidies, it will be a costly addiction. France has so far spent an estimated €24 billion ($26.15 billion) to fund Europe’s biggest paid-leave program for two months, supporting more than half of the country’s entire private-sector workforce. In Germany—which now pays up to 87% of a worker’s salary, up from 67%—three-quarters of a million businesses indicated they would put as many as 10.1 million workers on subsidized leave by April 26, according to the federal labor agency. That is more than three times the level at the height of the financial crisis in 2009.
France plans to phase out its subsidy programs sector-by-sector over the next few months. Germany recently extended the period over which companies can draw on the program to 21 months from 12 months, provided certain conditions are met.
“We need to encourage the activity to restart,” French Labor Minister Muriel Pénicaud said. “At some point it’s reasonable for companies to pay part of the paid leave. It will be measured so it’s not a cleaver in terms of employment.”
Bistr’Océan offered a takeout service in the shopping mall Océane in Rezé, France, on May 25.
Photo: Agnes Dherbeys/MYOP/The Wall Street JournalUnlike major economies on the continent, the U.K. didn’t have a paid-leave program in place when the pandemic hit. Applications for its Coronavirus Job Retention Scheme opened on April 20, and by May 11 it was paying up to 80% of the wages of 7.5 million workers at 935,000 businesses.
Recognizing that businesses would need help for longer than hoped, U.K. Treasury chief Rishi Sunak extended the program’s termination date to October from June. From August, it will change to allow what the government calls more “flexibility,” requiring businesses to pay a larger share of wages as workers put in more hours. The Office for Budget Responsibility—an independent state body that monitors the costs of government programs—calculates the U.K.’s program will now cost as much as £56 billion ($68 billion), up from £42 billion when it was launched. That is £7 billion more than the U.K. government borrowed in the whole of the last financial year.
“Nobody expected such a massive increase in claims. The numbers are very, very large.” said Stefano Scarpetta, director of employment at the Organization for Economic Cooperation and Development.
Mr. Scarpetta said governments across Europe are discussing how best to modify the programs. The point is to avoid propping up zombie companies that have no realistic chance of reviving their activities.
“The general rule is that they have to be targeted on those firms that have a future, and temporary, or the cost will become pretty massive.”
La Guinguette restaurant, along the banks of the Loire River, France.
Photo: Agnes Dherbeys/MYOP for the Wall Street JournalGerman unemployment rose by around 300,000 in April, to 5.8%, according to the federal labor agency. That is a modest increase compared with the scale of job losses in the U.S., but worse than Germany experienced during the financial crisis.
Lars Feld, chairman of the Council of Economic Experts that advises the German government, worries that if the crisis continues deep into next year, the government’s wage support will be keeping alive firms that aren’t viable.
Germany’s manufacturing sector was already in recession last year amid declining demand for its autos. The nation’s economy, Europe’s largest, faces profound challenges from the rise of electric-car makers such as Tesla, as well as global trends such as digitization. Those firms with nonviable business models in the future should shed workers or leave the market, Mr. Feld said.
“The short-time work program should not be extended beyond this year,” Mr. Feld said.
During the financial crisis, German manufacturing companies were the ones drawing on payroll subsidies, allowing them to step up production rapidly once demand returned. This time, it is mainly hospitality businesses like hotels and restaurants that are tapping the program, after being forced to close.
That weakens the rationale for the program, said Sebastian Link, an economist with the Ifo economic think tank in Munich. Workers in shops and restaurants tend not to have the same level of company-specific knowledge that is costly for employers to lose, he said.
Andrea Knebel, a business consultant at Robert Bosch GmbH in southwest Germany, has been on paid leave since April 1, along with her entire department. The factory where she works, in the Black Forest region, normally makes electric motors for auto makers such as BMW. But production was reduced after the country’s auto factories shut down in March.
Germany’s federal labor agency pays Ms. Knebel 67% of her lost wages, but that is topped up by Bosch to as much as 90% thanks to an agreement negotiated by the IG Metall metalworkers’ union.
Ms. Knebel thinks she will be able to return to work, though she doesn’t know when. The last time she was on a paid-leave program, during the financial crisis, she worked four days a week and was paid for five. Some of her co-workers in the factory are worried about losing their jobs, she says.
She has spent her free time cleaning, cooking, cycling and grocery shopping for elderly neighbors. But she needs to be ready to report back to work at a day’s notice. “Of course, I can’t sail to Tahiti,” she said.
Write to Stacy Meichtry at stacy.meichtry@wsj.com, Paul Hannon at paul.hannon@wsj.com and Tom Fairless at tom.fairless@wsj.com
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