Europe’s road to re­cov­ery

Ger­many has got much right – but it’s not out of the woods yet Justin Hug­gler

The Daily Telegraph - Business - - Front Page -

‘What must not hap­pen is an­other com­plete lock­down. The Ger­man econ­omy would not sur­vive that’

Ger­many has weath­ered the coronaviru­s cri­sis as well as pretty much any­where. With just 9,276 deaths, the toll has been far lower than in the UK or other ma­jor Euro­pean coun­tries. But even an un­prece­dented gov­ern­ment res­cue pack­age worth more than €1.1tril­lion (£1tril­lion) has not been enough to save Ger­many from its worst ever post-war eco­nomic slump.

Ger­man GDP fell by 10.1pc in the sec­ond quar­ter of 2020 – the big­gest drop since records be­gan in 1970. Un­em­ploy­ment rose to 4.2pc in June.

Ex­ports, the main­stay of the Ger­man econ­omy, fell by around a quar­ter in April, and a re­cov­ery in May and June, while promis­ing, has not been enough to off­set the loss. “The corona pan­demic has left large parts of the econ­omy in a state of shock,” says Joachim Lang, di­rec­tor-gen­eral of the Fed­er­a­tion of Ger­man In­dus­tries (BDI). “Hope­fully, we have now reached the bot­tom. For the rest of the year we ex­pect growth to pick up again. But it will take at least two years for the econ­omy to re­cover from this re­ces­sion of the cen­tury.”

Yet it could have been much worse. The Ger­man GDP fig­ures, while shock­ing, do not com­pare to the 20.4pc drop in the UK’s GDP, the 18.5pc fall in Spain or the 13.8pc in France. On av­er­age, un­em­ploy­ment across the EU rose by 2.7pc.

An­gela Merkel’s gov­ern­ment has won wide­spread praise for its han­dling of the virus in gen­eral, and Ger­man busi­ness leaders say it de­serves credit for staving off any more dam­age to the econ­omy. In March, as the scale of the eco­nomic im­pact of the cri­sis be­came clear, the Ger­man gov­ern­ment put to­gether an am­bi­tious res­cue pack­age.

Olaf Scholz, the fi­nance min­is­ter, an­nounced he was aban­don­ing the Ger­man mantra of the “black zero” – a bal­anced bud­get with no new bor­row­ing. In­stead, he threw the weight of Ger­many’s re­serves and ca­pac­ity to bor­row into res­cu­ing the econ­omy. The re­sult was the big­gest state aid pack­age in Ger­man his­tory, worth a to­tal of €1.1 tril­lion.

Fu­elled by €156bn of new bor­row­ing, the pack­age in­cluded €100bn in loans to bail out big busi­ness, €400bn in gov­ern­ment guar­an­tees for ex­ist­ing debts, €100bn for the state in­vest­ment bank, and €50bn in grants for small and medium-sized en­ter­prises.

Scholz, a man more usu­ally known for dry un­der­state­ment, de­scribed it as a “fis­cal bazooka”. This was fol­lowed in June by a stim­u­lus pack­age worth an ad­di­tional €130bn. De­signed to get the econ­omy work­ing again, it in­cluded a tem­po­rary cut in VAT from 19pc to 16pc un­til the end of the year, €25bn in fur­ther grants for small and medium en­ter­prises, cash in­cen­tives for elec­tric car pur­chases, and ma­jor new gov­ern­ment in­vest­ment in schools, nurs­eries and hos­pi­tals.

“The fed­eral gov­ern­ment re­acted quickly and com­pre­hen­sively. This was es­pe­cially im­por­tant as a sig­nal to busi­ness,” says Klaus Wohlrabe of Mu­nich’s Ifo In­sti­tute for eco­nomic re­search. “It can be safely said that many com­pa­nies would not have sur­vived with­out this help. Of course, you can al­ways say they could have done more, but I don’t think you can be dis­ap­pointed.”

Ger­many has won praise for its Kurzarbeit fur­lough scheme, un­der which busi­nesses can cut em­ploy­ees’ work­ing hours with­out fur­lough­ing them com­pletely, with the gov­ern­ment mak­ing up some of the short­fall in their earn­ings. But while bailouts for big busi­ness stole the head­lines – in­clud­ing €9bn for Lufthansa in re­turn for a 20pc gov­ern­ment stake in the air­line – smaller com­pa­nies are feel­ing the heat, ac­cord­ing to Mario Ohoven, pres­i­dent of the As­so­ci­a­tion of Small and Medium En­ter­prises.

“We fear the end of hun­dreds of thou­sands of small and medium-sized busi­nesses. A fifth of all Ger­man com­pa­nies al­ready con­sider their sur­vival to be at risk from the coronaviru­s cri­sis, and that num­ber will only rise,” says Ohoven.

“Ger­man SMEs are ex­pect­ing a to­tal loss of around €250bn for the months of March to May alone. The re­sult­ing liq­uid­ity bot­tle­necks can­not be bridged much longer, even with gov­ern­ment aid. In­no­va­tion bud­gets are be­ing cut by a fifth across all in­dus­tries and com­pany sizes. Our com­peti­tors in the US and China are al­ready rub­bing their hands to­gether.”

Ohoven warns against grow­ing talk of a sec­ond na­tion­wide lock­down amid a rise in new in­fec­tions in re­cent weeks. “What must not hap­pen un­der any cir­cum­stances is an­other com­plete lock­down. The Ger­man econ­omy would not sur­vive that,” he says.

“The fed­eral gov­ern­ment must fi­nally muster up the courage for fun­da­men­tal re­form. We need no­tice­able tax re­lief for cit­i­zens and busi­nesses fast.”

It is im­pos­si­ble to gauge how many busi­nesses have sur­vived be­cause bank­ruptcy dec­la­ra­tions have been sus­pended un­til Septem­ber, says Marc S Ten­bieg, chief ex­ec­u­tive of the Ger­man Mit­tel­stand Fed­er­a­tion, a ri­val as­so­ci­a­tion of SMEs. “I fear the fis­cal vaults may have been opened too soon. This could be a prob­lem if a sec­ond lock­down hits the Ger­man econ­omy,” he says.

Small and medium en­ter­prises are still strug­gling with the ef­fects of lock­down, with hos­pi­tal­ity, re­tail and events strug­gling to catch up on lost rev­enue, he adds.

“While praise is due to the gov­ern­ment for its fast and com­pre­hen­sive mea­sures, the emer­gency aid pro­gramme for SMEs is turn­ing out to be a bu­reau­cratic mon­ster,” Ten­bieg warns. “An over­re­liance on loans is putting im­mense fu­ture in­ter­est bur­dens on com­pa­nies.”

More­over, Ger­many can­not hope to ne­go­ti­ate the eco­nomic con­se­quences of the virus alone. The coun­try is highly de­pen­dent on in­ter­na­tional trade; it needs its trad­ing part­ners to get back on their feet too.

So far, public opinion has been firmly be­hind the mea­sures taken by Merkel’s gov­ern­ment. The cri­sis has trans­formed the Ger­man po­lit­i­cal landscape. Scholz’s ca­reer seemed over when he was beaten to the lead­er­ship of his So­cial Demo­cratic Party last year; now he is rid­ing a wave of pop­u­lar­ity that has seen him in­stalled as the party’s can­di­date for chan­cel­lor.

But there are signs of a shift amid talk of a new lock­down. Bild, Ger­many’s high­est-sell­ing news­pa­per, has ac­cused Merkel of scare tac­tics and dam­ag­ing the coun­try with her re­luc­tance to loosen restric­tions.

With elec­tions loom­ing next year, the po­lit­i­cal landscape could change rapidly if the eco­nomic re­cov­ery proves slow.

Lang of the BDI warns that the eco­nomic bailout can­not cover the Ger­man econ­omy’s deeper struc­tural prob­lems.

“Any­one who wants to get out of the corona cri­sis with a sta­ble in­dus­try must strengthen their com­pet­i­tive­ness,” he says.

“A sprint through the cur­rent cri­sis is not enough for this, it is more of a marathon, with 2030 as the tar­get.

“In terms of key fac­tors such as cor­po­rate tax­a­tion, in­fra­struc­ture and en­ergy costs, Ger­many re­mains poorly po­si­tioned in an in­ter­na­tional landscape.”

To­mor­row: Italy fears ‘catas­tro­phe’ as tourists van­ish

The gov­ern­ment of Ger­man chan­cel­lor An­gela Merkel, cen­tre, has re­ceived plau­dits for its virus re­sponse

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