Germany Will Be a Post-Coronavirus Winner

Marti Subrahmanyam

By Marti Subrahmanyam, Elena Carletti, Marco Pagano and Loriana Pelizzon

By Marti Subrahmanyam, Elena Carletti, Marco Pagano and Loriana Pelizzon

All great economic crises pose two equally important challenges: they drain the liquidity necessary for the functioning of businesses, large and small, and burn up their equity capital, or a substantial part of it. Of the two, the former is the immediate challenge amid the coronavirus-induced lockdowns. Providing liquidity to companies is the top priority to ensure their survival. Yet this doesn’t guarantee their healing, or their ultimate durability and growth. Equity capital, the stuff that’s needed to invest and thrive, is essential to the second stage of recovery.

Today, many businesses have seen their revenues almost vanish and, therefore, find themselves in a severe cash crunch. Various proposals have been put forward to funnel money to businesses before they’re forced to lay off employees, cancel their supplies, and close their doors. One of these proposals is to have the European Investment Bank — the European Union’s lending arm — provide a liquidity lifeline to the continent’s firms, in the form of immediate, massive funding at zero interest to enable companies to meet their expiring debt obligations, with backup funding provided by the European Central Bank.

This is a step in the right direction, but it’s not enough by itself: It keeps the patient on life support, but doesn’t let them recover. Indeed, as liquidity reaches companies through loans, it increases their leverage through greater debt and, therefore, their default risk, leaving them with little room to invest and grow. Growth, which has already been low for a long time in most of the euro zone, especially in Italy, will slow even further if its businesses run out of equity capital after the crisis because of the sharp rise in indebtedness.

Read the full Bloomberg article.

Marti Subrahmanyam is the Charles E. Merrill Professor of Finance, Economics and International Business