Torben M. Andersen,
Department of Economics and Business Economics, Aarhus University,
Denmark is currently in a process of reopening after a second wave of COVID-19 cases late 2020 and early 2021. Extensive lockdowns were imposed in late 2020, and a sequential reopening process dependent on the number of new cases and hospitalizations started in March 2021. Recent developments have been favourable, and the reopening steps have been accelerated.
An important element in the Danish strategy is extensive testing (genome sequencing, tracing etc.), and access to many reopened activities is conditional on a negative COVID-19 test (valid for 72 hours). Vaccinations are being rolled out, but Denmark has decided not to use the AstraZeneca and the Johnson and Johnson vaccines (voluntary access to these vaccines is being discussed), and this slows down the process. Vaccination of all above the age of 50 has been set as a political milestone for the final steps in the reopening plan, and according to the latest projections, this will be reached early July.
Alongside the lockdowns, various emergency packages have been introduced. From an individual perspective, this offers insurance against and compensation for some direct consequences of the pandemic. From a broader perspective, the schemes aim at protecting production capacity (job-matches, avoiding firm closure) to support a swift recovery when the economy is fully re-opened. This is essential to avoid that the pandemic causes a more persistent decline in economic activity and increase in long-term unemployment. The key elements in the emergency packages are: i) a wage compensation scheme protecting job-matches such that workers receive their normal wage (up to a cap) and firms get a subsidy (75% or 90% of the wage costs), ii) compensation for fixed costs for firms experiencing a decline in turnover of at least 30%, iii) a support scheme for self-employed, and iv) liquidity and guarantee schemes for all firms (including postponement of payments of taxes and VAT). In addition, there are various other schemes, e.g. for culture. These measures are a very unusual form of economic policy in a very unusual situation; they have a status quo bias, and it is therefore essential that they are temporary and phased them out alongside re-openings.
These measures are essentially the same as applied during the first round of lockdowns in early 2020. Alongside the re-openings over the summer 2020, these emergency packages were phased out. Over this period the economy (production, employment) followed a clear V-pattern with a sharp drop at the onset of the pandemic and a swift recovery during the reopening phase. As an example, about 90% of those on wage compensation in April 2020 were in employment in October 2020. This is very close to normality since there are always in- and outflows from the labour market (retirement, sickness etc.). The decline in economic activity in Denmark in 2020 is among the lowest for OECD countries. Although many factors contribute to explaining this, the overall purpose of the emergency measures as temporary measures to maintain job-matches and production capacity was thus borne out in reality.
A similar response is expected to follow the current re-openings, and early indicators confirm that this is happening. Interestingly, during the second lockdown round, the decline in economic activity has been smaller than during the first round, despite the lockdowns being as or perhaps slightly more widespread than in 2020. This indicates adjustments and adaptability to the new situation via numerous channels, including more “working from home” and adaptation of sales channels (click and collect, e-commerce, virtual meetings, teaching etc.). A high level of digitalisation is essential to resilience, making it easier to substitute virtual contacts for physical contacts.
Denmark entered the COVID-19 crisis with a well-performing economy, including low unemployment and sound public finances due to previous consolidation and reforms. Consequently, there was fiscal space to pursue rather aggressive policies in terms of emergency packages, but also more traditional fiscal policy measures. At the end of 2019, public debt was about 33% of GDP, among the lowest within the EU and well under the 60% baseline target. Despite the policy measures taken and the drop in GDP in 2020, debt will, according to the Ministry of Finance, be about 45% of GDP – still low by any international comparison.
In a medium perspective, uncertainty remains on the pandemic, including the global roll-out of vaccinations, mutations and the effectiveness of vaccines. Even in an optimistic scenario, the economy does not return to a pre COVID-19 situation. Some structural changes are accelerated and others prompted by the pandemic, including working from home, virtual meetings, e-commerce etc.
Expert article 2977
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