Note 3: How did European firms cope with the Covid-19 crisis?

This work was originally published as an ifo Institute Research Report.

The Covid-19 crisis is of unprecedented nature. In Europe, the pandemic triggered a series of lockdowns that brought many sectors of the economy to a halt, disrupting the activities of firms across different i ndustries. The severity and duration of these lockdowns varied across countries, with some implementing strict measures to curb the spread of the virus, while others adopted more lenient approaches. Despite the differences in their responses, there was a common trend of increased public expenditures to support households and firms. These measures included direct financial assistance, tax relief, and support for furloughed workers, among others. In this report, we examine how European firms perceived and responded to the crisis.

Understanding how firms behave and adapt their expectations in a period of crisis is crucial for policymakers and economists, as it provides insights into the drivers of economic growth and the resilience of firms. By understanding how firms react to and adjust to crises, policymakers can design more effective policy responses that mitigate the impact of economic shocks on businesses and individuals. In the case of the Covid-19 pandemic, the crisis has been particularly disruptive due to its global reach and the scale of the measures taken to contain its spread. The pandemic has highlighted the vulnerability of businesses to exogenous shocks and the importance of being able to adapt and respond to changing circumstances. By examining how European firms responded to the pandemic, we can gain valuable insights into the factors that shape firms’ behavior during crises and the implications for long-term growth and prosperity. Ultimately, this can inform future policy decisions aimed at improving the resilience of firms and the broader economy.

In this report, the authors focus on an understudied aspect of the crisis which is the perception of the crisis’ effects by firms during the pandemic. There is little knowledge about how firms assessed the situation and adjusted their expectations accordingly during the different stages of the pandemic. How did firms react and adjust their behavior in the midst of the c risis? Did this alter their long term expectations and investment strategies? What were the effects of the governmental response on them? Can we see lasting effects of the crisis and could it impact long term g rowth? To answer those questions, we leverage and combine unique survey data from Denmark, Germany, and Norway to understand how European firms adjusted their expectations and behavior. We also study how governmental measures taken during the crisis and targeted toward firms affected firms’ expectations and behaviors.