Germany set for return to growth, but cannot emerge from crisis alone

The country has thrown more than €1.1 trillion at the crisis, but its recovery is dependent on how the rest of Europe fares

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
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

This five-part series, published each morning this week at 6am, looks at how major European economies have coped with the Covid crisis, and how governments have scrambled to save jobs and businesses. Part two visits Germany, where Angela Merkel has thrown a “fiscal bazooka” at the crisis, but a swift bounce-back is far from guaranteed.  

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 €1.1 trillion (£1 trillion) has not been enough to save Germany from its worst ever postwar 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 Industry (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.

Merkel and Scholz pull out all the stops

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 (£1 trillion). 

Fuelled by €156bn of new borrowing, the package included €100bn (£90bn) in loans to bail out big business, €400bn (£360bn) in government guarantees for existing debts, €100bn for the state investment bank, and €50bn (£45bn) in grants for small and medium 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 (£117bn). 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 (£23bn) 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 bail-outs for big business stole the headlines – including €9bn (£8bn) 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 Federation of Small and Medium Enterprises (BVMW).

“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.”

German economy 'would not survive' second lockdown

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 (DMB), 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. 

“Whilst 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 over-reliance 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 (SPD) last year; now he is riding a wave of popularity that has seen him installed as the party’s candidate for chancellor.

Angela Merkel has been a key player in organising the EU's response to Covid-19 Credit: John Thys/Pool via REUTERS

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 is slow.

Lang of the BDI warns that the economic bail-out 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.”