Why is Britain's COVID-19 economic response not hitting the spot?

Earlier this morning Business Secretary Alok Sharma was grilled by Sophy Ridge about how many loans the Government’s new COVID-19 emergency lending facility had actually handed out. His answer?

Here’s the funny thing about this. You or I may hear that so far only 4,200 of these emergency loans have been issued and assume (with some reason) that this is a policy failure. After all there have been hundreds of thousands of applications; 4,200 would represent barely more than a percentage point of the total companies say they need. But inside the Treasury and indeed in many of the UK banks they are genuinely convinced they’re doing a pretty excellent job.

And from their perspective, they are. The number of loans may not sound big, but it’s increasing at an unprecedented rate! Lots of money is going out the door! More to the point, they say, there has never been a programme as big and as generous in British history! The government is guaranteeing so many billions of loans to businesses, taking 80% of the potential losses of those companies don’t pay them back! There has quite literally never been anything like this.

Then again there has never been an economic crisis like the one accompanying COVID-19. And it is pretty clear that the response, while unprecedented, may not go far enough. Indeed on a pretty much daily basis the Treasury and government more broadly have been having to add on extra baubles and programmes to make their support package more, well, supportive.

Why? One thesis comes down to culture.

Culture isn’t something economist tend to spend much time exploring. Yet it is all-important for all sorts of very obvious reasons. The extent to which a country has a culture of, say, paying its taxes rather than avoiding them makes an enormous difference to the wider economy.

In Britain’s case, its economic culture – indeed the structure of its economy – have various features which, in good times, tend to serve it pretty well. One of them is that for all that they were the epicentre of a financial crisis a decade or so ago, Britain’s banking culture is typically quite wary about lending to small businesses. UK banks simply don’t enjoy taking risks in the same way as banks in other countries. In Germany, for instance, there are regional savings banks, Sparkassen, which often lend at extremely generous terms to their small businesses.

That caution serves the financial system well in good times. But not in times of crisis. And here we are in perhaps the biggest economic shock (at least in terms of size, speed and broadness) that we’ve ever seen. The Treasury is urging the banks to lend out more. Yet they are, frankly, dragging their feet.

Now, as I say, the banks are very keen to emphasise that lots of money is in the process of leaving the door – that they are going further than ever before to support small businesses. But “going further than ever before” means something very different in the UK than it does in Germany. In Germany it means pouring cash directly into the pockets of small businesses owners; in the UK it means spending a few days consulting the state aid rules and working out whether there’s anything to prevent you lending to someone without taking their home as collateral.

It is easy to moan at the Treasury and say: hang on, instead of only guaranteeing 80% of these loans you should be doing what they’re doing in many other countries and guarantee 100% of the loan. And indeed, that could well help get the money out of the door quicker. But it wouldn’t necessarily get to the real nub of this problem: that in the face of an economic crisis our institutions are being asked to behave in a way they’ve never behaved before. That kind of adjustment takes time.

I touched on this in a column a week or so ago which pointed out that the furlough scheme, under which workers will have 80% of their wages paid by the state (what is it about 80%, incidentally?!), is actually modelled on a German scheme called kurzarbeit.

And while kurzabeit works well in the German labour market, where people tend to stay in jobs for longer, it is less immediately obvious that it would transplant successfully into a labour market which, in Britain’s case, is defined by its flexibility and churn. In other words, even if you know this is the right remedy, there is another question: if it’s incompatible with the deep-seated culture of a country how can you be sure it will actually get implemented properly?

These are, of course, high-level problems which should come quite low down in the scheme of things. Britain is in the teeth of a totally unprecedented crisis so the Treasury is quite rightly throwing whatever it can at the problem. But as we assess whether the schemes it is putting into place are working, it is worth considering whether their success or indeed failure is a consequence of their design or of the environment into which they are being thrown.