The recent measures announced by the government have not been unanimously welcomed. Many players, particularly in the Horeca and culture sectors, fear for their future, while the economic impact of the decisions won’t be known for a long time. So there are a number of questions. Are these measures sustainable? Should we fear inflation? Who will pay the price?

Are the measures decided by the government a good idea in terms of economics?

Vincent Hein: We sometimes tend to play off health and economic priorities. But we must understand that if we get to an uncontrollable second wave of the epidemic, it can have long-term economic consequences. The government’s choice to close [institutions] or not, is not binary. When certain sectors are closed, it is to better control the wave, and it can also have positive effects on the economy. The thought process behind it is much more complex than just “favouring health care workers versus favouring businesses”. Looking at it more generally, if we don’t do anything it might also have an economic impact, with people being scared, not wanting to go to restaurants, consuming less, etc. As economists, we would then also have to look at the cost of a complete lockdown versus an uncontrolled outbreak. So, at the end of the day, it’s really difficult to judge the government’s decisions. 

What could be the potential impact of these measures?

VH: Everything depends on the sector. At Idea, we follow the evolution of the different sectors and social indicators. For example, the impact of the closure of cultural sites, bars, restaurants... will be very hard. That sector is already very weak, and we saw a weaker recovery than in other sectors. Over the months post lockdown, teleworking remained a priority, and border workers did not spend the same way on lunch or dinner. This new shutdown is taking place during an already complicated time for the sector.

Luxembourg seems to have coped better than some of its neighbours. Is that an illusion?

VH: No, Luxembourg did cope better than its neighbours in the first half of the year. This is precisely due to the fact that a large part of activity could continue through teleworking, the financial place weighing heavily at the national level, so getting out of it rather well. But we must not conclude that everything is going well everywhere. There’s two different sides to Luxembourg, with services such as the financial centre, on one side, and on the other, a sector that depends on the presence of people in the country. We have companies that are very hesitant, that are in doubt. When we saw an upturn in activity, business leaders told us that they didn’t have total confidence in the future. 

Where does the government’s priority for these additional support measures come from? 

VH: It must be said that the government’s support measures, reinforced in particular in the most vulnerable sectors such as culture and events, show that it has done everything it deemed necessary. And the announcement of these new closures puts additional pressure on it. There’s also the question of the sustainability of aid. The Luxembourg state is in a more comfortable financial position than some of its neighbouring countries, giving it more leeway. In terms of overall economic management, the government is sending signals that Luxembourg will not fall into a downward spiral.

These measures, such as the increase of the minimum wage by 2.8% starting in January, will have a cost. Who will ultimately have to pay for it?

VH: Regarding the increase of the minimum wage, it is the companies that will have to pay. This is a cause for concern, since the companies that employ the most people at minimum wage are in the sectors that are currently in the most difficulty. It’s going to be hard.

Moreover, the assistance provided through the salary increase seems insufficient in my opinion. We also need compensation for companies. We could imagine a two- or three-month exemption for businesses that employ a lot of people at minimum wage. That’s about 15% of the companies. That would be consistent with the government’s philosophy and it would help to reassure people.

Under these circumstances, is there a reason to worry about significant inflation in the future? 

VH: There is no sign for inflation. It is almost too low right now. One of the reasons is that the ECB is massively supporting and injecting liquidity into the markets. Demand has contracted, we’re using less this year--because we’re just not allowed to. And even the wage increase should not have the inflationary effect it has had in the past.

Moreover, low inflation has a somewhat perverse effect, redirecting savings towards bricks and mortar, which maintains the rise in real estate prices. Consumers need positive signals, there are more than a billion euros in savings they cannot spend. However, if inflation is not to be seen in general, it could be felt in some sectors. 

This article was originally published in French on Paperjam.lu and was translated and edited for Delano.