Coronavirus, the Danish model: 13% of GDP to avoid economic crisis

Mindful of the mistakes made in 2008 in the name of austerity, the small and very rich Northern European country has decided to invest around 38 billion euros in a series of measures to support the economy, including helping companies not to lay off workers.

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HOW TO DEAL WITH THE ECONOMIC CRISIS CAUSED BY THE CORONAVIRUS

Spend a lot now so you don't have to do it laterThis is the recipe Denmark has implemented to deal with the economic crisis that is mounting following the necessary anti-coronavirus lockdown. The small and very rich Northern European country has decided to intervene massively using as much as 13 percent of its gross domestic product (GDP) to fill the wallets of citizens and businesses, preventing a collapse of confidenceAn operation that consists of a substantial freeze of the economy for three months, during which the government will cover much of the lost earnings of entrepreneurs, preventing the dismissal of employees. The initiative represents a decisive U-turn This contradicts the dogma of austerity, a cornerstone of Northern European economic thought, and is the product of the lessons of the 2008 crisis. At that time, Denmark had decided not to increase its debt, resulting in the highest unemployment rate in its history.

DENMARK MEASURES AGAINST CORONAVIRUS

Before analyzing the aid plan in detail, it should be emphasized that in Denmark all this is possible because it is a a very rich countrya very low public debt (37 percent of GDP compared to over 130 percent in Italy), and with a very small population (there are less than six million Danes).

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DANISH MODEL OF THE CORONA VIRUS

Specifically, as Danish Minister of Labour Peter Hummelgaard explains to the The Atlantic, in the next few days the government will guarantee private companies the payment of approximately 90% of workers' wages who earn up to three thousand euros, so that, despite being unable to work due to the restrictive measures, they will not be laid off. The measure will affect all workers earning up to fifty thousand euros a year and will be continued for three months, a period beyond which it is hoped that the situation will return to normal. The justification for the measures is based on the belief that failure to intervene, which would cause a series of mass layoffs, in the long run would cause much more serious damageThis way, the relationship between businesses and workers is preserved, and there will be no need to waste time rehiring after being laid off due to the crisis. The government essentially prefers to give companies money to keep their workforce, even though they're currently staying home, rather than funding unemployment benefits. Another effect of the aid is to prevent a compression of demand: since workers still have their salaries, they will be incentivized to keep buying, without stopping the economy.

HOW TO DEAL WITH THE ECONOMIC CRISIS CAUSED BY THE CORONAVIRUS

Denmark managed to approve this aid plan with the support from all parties present in Parliament, who have overcome their differences to address the emergency. Among the measures adopted, the government will guarantee 70% of bank loans to companies, cover fixed expenses, such as rent, in proportion to the decline in turnover, and extend unemployment benefits expiring in these three months. In total, Denmark will invest approximately 38 billion euros (13 percent of GDP), a mammoth figure that will inevitably increase the percentage of public debt. A choice that, however, according to several studies, would cause a relatively modest increase in debt (using 10 percent of GDP would cause a roughly 2 percent increase in public debt). A necessary evil, however, that could avert a much more significant economic catastrophe.

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