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Reacting to a crisis: Germany’s approach in a European perspective

Summary: The macroeconomics effects of the COVID-19 crisis which could be felt across the European Union varied in each member state – and the political reactions to this unprecedented situation, too. Compared to other European countries, Germany has set up an exceptional financial support program. This, followed by further economic stimulus packages coming up, could be key in recovering from this crisis and will have a major impact on the future economic development.

The COVID-19 crisis has shaken our societies and economies to the core and put a stop to everyday life as we know it. Business as usual is no more. In the midst of this worldwide pandemic state leaders had to come up with answers on how to tackle this exceptional event and live up to challenges rarely ever seen before. During the remaining year, the GDP in the EU is expected to drop by 7,4%[1] – which is a larger percentage than experienced during the 2008/9 Financial Crisis.

While the impact could be felt all across Europe, the effects varied. This can be deduced by taking a comparative look at the five biggest European economies.

The two countries which were hit the hardest were Italy and Spain with a year-to-year GDP reduction in April of -9.1% and -8.0% respectively. But the three other major economies Germany (-7.0%), France (-7.2%) and the UK (-6.5%)[2] suffered as well, as whole industries went into shutdown.

Although a trend can already be observed in April during the peak of the pandemic, the divergence will be seen more clearly in the aftermath of the lockdown. According to the Spring Economic Forecast of the European Commission the projected changes in employment in 2020 will reach a high rate in France (-9.1%), Italy (-7.5%) and Spain (-8,7%), while the negative volatility on the labor market will be less drastic in Germany (-0.9%) and the UK (-2,7%). At the same time, the yearly GDP of Germany is expected to decline by 6,5% in 2020, whereas the other four nations face a sharper GDP decline of 8 to 10%.

While the underlying macroeconomic causations behind these developments are complex, three factors can be taken into consideration to explain the diverging economic outlook.

The first factor is the extent to which the nation was epidemiologically affected by the COVID-19 pandemic. While the pandemic did affect all European nations, be it with a time delay, mortality rates greatly varied. The preparedness of the medical system, the amount of testing done and various other aspects can be looked at as an explanation. Whatever the exact causations were, nations with lower case numbers and a lower mortality rate had to go into lockdown later and could reopen their economy earlier, which eased the burden placed on their businesses.

The second factor to consider is the initial political and financial situation each country was in and the individual inherent economic risk.

Maintaining the “schwarze Null”, the constitutionalized commitment to keep a balanced budget and not take up any new debt has been breached in Germany. But exceptional times call for exceptional measures and the Federal Republic has rolled out the biggest fiscal/stimulus package ever since its inception some 70 years ago.

On the other hand, due to this fiscal responsibility shown over the course of many years, Germany had more financial leeway to implement generous measures, than other states like Italy, which had already struggled to comply with the European Fiscal Compact in the past.

In 2019 Italy already had a large debt of 147.8% of their GDP (compared to Germany’s 68.6%), which made it more expensive and difficult for its government to borrow funds to implement new support programs. The national debt is expected to further increase during the recession and not only put its own credit rating into jeopardy, but with it the whole Eurozone due to the strong existing interdependencies.

Spain and Italy also have a different sectorial composition compared to some more northern European states. Both countries – and to extent France – rely heavily on tourism and were thus the most vulnerable to closed borders and stay-at-home measures. Even if border restrictions are slowly lifted and traveling activities will carefully resume, the sector still has a long way to go to recover from this external shock.

The third factor are the fiscal reactions of the member states during the first month of the crisis. To absorb the blow that was being dealt to the economy at large and some industries in particular by the COVID-19 pandemic, all afflicted countries provided financial help to companies and employees, just to a varying degree.

Italy, one of the earliest and hardest hit countries in Europe, implemented its first measures as early as the 19. of March and reinforced further measures on the sixth of April. The two prime European economies, France and Germany, followed shortly afterwards during the end of March and have also extended/enlarged their measures in April.

When it comes to the tools of implementation, each country has put an emphasis on different measures. Increased spending in health care was a no-brainer, as was the deferral of tax payments in most European countries. But even there we see a difference in the amount of funds spent.

While Germany excels both in absolute numbers and in regard to the GDP-percentage when it comes to direct spending like offering grants to SMEs and self-employed, paying companies to not lay of their workers and supporting the temporarily unemployed. The Mediterranean countries France, Italy and Spain mostly shied away from these direct measures by only allocating a minimal part of their GDP to them.

The UK on the other hand found that their tool of choice is handing out loans and debt assumptions amounting to nearly 16% of their GDP. Some countries have placed restrictions on gaining access to the programs, like Denmark and France which have decreed, that companies which are based in tax havens will not be eligible for receiving state aid.

Taking all measures and guarantees into consideration, Germany leads the field by putting forward a stunning amount of over 2 trillion Euros or 60% of their GDP[3] during the first month of the crisis.

This once in a life time crisis has put a lot of stress on each of the European member states, both in regard of managing the health crisis in itself and trying to keep the economy alive at the same time. The swift and profound actions Germany has taken, puts it on top of their class – which can be seen by the predicted GDP and employment rate. But even if Germany should come out of the crisis in relatively good shape, it is only as strong as the countries surrounding it and to which it has deep economic ties.

That is why a strong European response is needed – as Macron and Merkel have already proposed. But not only that.

Governments across Europe have to lay the legislative framework to support businesses not only during, but especially after the crisis. Even if the initial response phase is over, shops are slowly reopening and factories start producing again, there is still a lot of support needed for the economy.

The time is now to lay the groundwork for the recovery and implement measures in other countries. Seeing the troubling economic outlook and difficulties many industries still face, it is not imprudent of business leaders to demand more fiscal support from their governments.

Germany’s Finance Minister already announced a major economic stimulus package coming in early June that will amount to up to 150 billion euros.

Authors: Berthold Schilling & Bjoern Sackniess

[1] https://ec.europa.eu/info/sites/info/files/economy-finance/ip125_en.pdf

[2] https://www.imf.org/external/datamapper/[email protected]/FRA/DEU/ITA/ESP/GBR

[3] https://www.bruegel.org/publications/datasets/covid-national-dataset#germany