The decisions of the governments of the developed countries of the world to strengthen with state capital all the companies of their countries in a horizontal way, which companies asked for protection against the economic crisis caused by the measures against the pandemic Covid-19, were correct.
The problem is the duration of these government liquidity aids as well as the conditions for their granting, as well as the new mutant “market” that will emerge after the end of these state aids and the undoubted wave of business bankruptcies that will follow.
Always, when for specific reasons the free economy/market is strengthened by state liquidity, the former market equilibrium point changes and shifts to a new equilibrium point.
By Thanos S. Chonthrogiannis
©The law of intellectual property is prohibited in any way unlawful use/appropriation of this article, with heavy civil and criminal penalties for the infringer.
The new equilibrium points for the EU market
Southern Eurozone member countries facing difficult and intractable budgetary problems as well as competitiveness of their economies and given that they have few opportunities and limited budgetary means will find that the dawn of the new market is losing a significant part of their productive web.
On the other hand, the member countries of the Northern Eurozone will find that the unprecedented government liquidity boost will bring long-term delays in clearing between productive and non-productive enterprises.
This will only have political benefits because it will keep unemployment levels low, which in this case translates into political benefit for the ruling parties but the non-productive businesses will continue to operate increasing their debts.
The only way to avoid these above-mentioned twin problems within the Eurozone-EU is to immediately create a strict framework for government liquidity assistance, but at the same time to be generous with approved provisions of state liquidity subsidies.
This will give both in short-term and long-term horizons depth, scope and high liquidity in EU money and capital markets, respectively.
The proposed framework for state liquidity aid should be the same for the whole of the Eurozone. Accepting all member countries in this context, at the same time, plans must be made for the future of European industry and the manufacturing sector in general.
The aim of these plans should be to maximize the depth and breadth of the EU markets with many small and large companies, creating desirable and fully competitive markets in every sector.
At the same time, tomorrow’s planning for European industry should ensure its economic self-sufficiency and competitiveness globally. The design should be of such a class that it includes the possibilities of complete flexibility and adaptation to the new data and against any predicted and unpredictable scenario in a “high degree of variability” world order, without adopting or excluding adoption plans for protectionism if required by the prevailing conditions.
The proposed framework for granting state aid rules
Definitely, the first and foremost rule that should be specific to its details is the rescue efforts that each of the eurozone member countries is implementing individually.
As we have mentioned, there should be a common framework of rules that will characterize the decisions for the provision of state aid, a framework of rules that will follow a hierarchical scale, in terms of its importance criteria for the decision to render state aid to companies/businesses.
Criterion 1
The pace and level of productivity that each company demonstrated separately before the start of the Covid-19 pandemic could be the first important criterion.
Businesses that prove in practice that they are productive should have secured liquidity. However, this financing/liquidity should be provided in the form of an increase in the share capital of the candidate for state aid, which will allow the state with the funds allocated to the company to acquire a corresponding percentage of its share capital.
In any case, borrowing financing should be avoided and be the last resort, as many companies will experience debt consolidation in the future, turning the state’s state aid portfolio into a super-market from high-debt businesses or from companies that will be close to bankruptcy and will be very difficult to sell to get the state back its funds.
Criterion 2
The second most important criterion to consider is whether an enterprise which asks for state liquidity aid is insecure about its balance sheet.
More specifically, we would suggest that companies that, before and after the start of the pandemic, have a high degree of uncertainty in their balance sheets should not opt for state aid, that is, they should not be maintained.
It is preferable for any planned state aid for these companies to be provided in the form of unemployment benefits and funding for their former employees’ retraining programs to make it easier for them to be absorbed by the labor market.
Criterion 3
The third criterion in a row is a form of mass due diligence application for all businesses in the EU and mainly in the Eurozone.
The point is that member countries can and should support those who are clearly productive, giving them the right to development. But states and economies in general are not able to judge which business is and which is not worth saving financially.
The criteria described above 1 & 2 can give a clear picture for several companies but they cannot give a clear picture for the whole and perhaps the largest percentage of companies.
So this task of applying due diligence-on which business is or is not worth saving financially and since the criteria 1 & 2 respectively do not give them a clear picture-should be done and given their vast experience from the capital markets.
The proposed solution
Capital markets can get to know the companies by collecting all the information available to them about what is happening and what you expect from each business. Banks are not able to have this information for all businesses. Therefore, state aid should not appear to be unilaterally channeled.
The solution is to create a Public and Private Sector Partnerships (PPSP) investment scheme that will include the available government funds to provide liquidity along with private investment funds that will enable the implementation of due diligence in practice.
The above investment scheme, due to the private initiative, will be able to separate which company really needs liquidity and does not clearly emerge from the application of criteria 1, 2.
The private investment sector and capital markets in general can pinpoint exactly which manufacturing companies have the data to survive.
State investment funds, due to their composition and mission which vary from country to country, although they are currently “ordered” by their governments to take on the role of supporting economies in their countries, they should not lose their institutional role.
The participation of state funds in a new investment-type scheme (PSPP) in cooperation with private sector funds, will shield and protect the required state aid-liquidity, so that business support is not done horizontally and without discrimination.
