Economics and politics - comment and analysis
16. March 2020 I Heiner Flassbeck I Europe, General Politics

Germany’s Emergency-Stop: The Economy in the Time of Corona

Translated and edited by BRAVE NEW EUROPE


At a time like this policy-makers must focus on a few stable patterns in social and economic relations to help reduce insecurity. But even this is difficult, because there has never been such an emergency-stop and such a shock.

From tomorrow onward, large parts of the economy in Europe and in some other regions will simply stand still because governments want to minimise the social contacts of each individual. This is a supply and demand shock at the same time and involves the possibility of drastic financial repercussions. At the moment, European governments are building on the Chinese strategy, where radical measures have initially succeeded in dramatically slowing down the spread of the virus.

Politicians have little choice, because there is currently no other similarly probable scenario to which one could adapt right now. Even in this scenario, which is manageable with an overall time frame of two to three months, the effects on the economy will be serious but manageable. If one-third of the economy suffers a total loss of production for two months, that is already a five percent decline in economic output. If a few less directly affected sectors are added, which only have to restrict their production, a ten percent drop in gross domestic product is easily achieved.

A mild scenario

This would normally have a dramatic impact on unemployment, but its rise can be cushioned by the state providing workers with payments and other measures. The companies that are particularly affected should be helped to survive the few critical months, as the German Federal Government has already decided, by unlimited and practically newly created state loans. Nevertheless, such a temporary crisis is largely absorbed by the companies, which have to accept considerable profit losses. However, most companies can survive such a period of weakness with state support. This also applies to employees, although there may be hardship at the lower end of the wage scale, which should be cushioned separately.

It is indeed possible to survive such a two to three-month crisis without too much upheaval. The economy holds its breath, so to speak, and returns to its routine as soon as the air is literally clean again. It becomes problematic if, as has already been observed in some regions, hoarding of essential goods gets out of hand. This must be stopped as soon as possible by limiting the quantity of critical products.

A mild scenario is the most probable variant from the current point of view and it is hardly possible and also not particularly sensible to deal with far worse variants in public at this stage. In China, after all, in an extremely densely populated environment (Wuhan has ten million inhabitants), it has been possible to stop a more rapid original spread of the disease (i.e. as was the case before the government’s vigorous action). This certainly does not rule out a second wave of infections, but it shows that a delaying tactic is appropriate. Even if the measures in the Western democracies have only got off to a slow start, there is much to suggest that the curve of new infections in Europe will also flatten considerably in the coming days and weeks.

It is to be expected that the stock markets will continue to ride a rollercoaster even in such a (mild) scenario. Although the movements on these markets should not be overestimated, it would be best to close the stock exchanges and large parts of the financial casino throughout Europe next week as well and not to reopen until conditions have normalised. The additional volatility and uncertainty emanating from these “playgrounds” is really not necessary.

Corona crisis is not comparable

What does not help at the moment is the ever-increasing “hopes” that this crisis will solve the climate crisis right away, because people must now understand that the way we do business is not sustainable. Those who believe this will only be terribly disappointed. The most important benchmark that matters in the climate question has gone in the wrong direction in this crisis. In absolute terms, the price of oil is cheaper than it has been for a long time and, at 35 US Dollars in relation to the incomes of the mass of consumers, has reached its lowest level for many decades.

The Corona crisis is about the short-term reduction of economic activity because social contacts are to be reduced and supply chains are broken. The climate issue is about long-term changes in behaviour, which must be based on a shortage and increase in the price of fossil fuels if it is to be successful. In the Corona crisis, the state is deliberately risking the existence of jobs and income and compensates for this by its full commitment as a guarantor of stability. In the climate crisis, economic slumps must be avoided and a rapid and long-term reliable structural change must be sought. The two crises are not directly related and should not be conflated.

Nevertheless, conclusions must be drawn from the Corona crisis for economic and social coexistence around the world. First of all, the crisis shows how indispensable global institutions such as the WHO (the World Health Organization) are in a world that is so closely interwoven economically. Also, the states whose elected governments are ultimately responsible will have to seriously consider whether in future all health-care products needed for such emergencies can be produced abroad like any other product, or whether they will have to be produced locally. It has also become clear that we cannot simply rely on the solidarity of neighbouring nations. In principle, too, we must consider whether the extent of the global networking of production still makes sense in view of such potential health risks.

The first economic policy mistakes have already been made

The German Federal Government has reacted quite rightly with its first major step, the unlimited credit guarantee for affected companies. The second step, however, must be to handle this completely unbureaucratically and also to proceed generously on a large scale in case of repayment problems. The closure of shops and service providers must also be eased quickly as soon as reliable data are available on a significant reduction in new infections.

It will be crucial for the European impact of the crisis that Germany finally understands the poor economic situation in which Italy and France found themselves before the Corona crisis, through no fault of their own. There is already talk again that these countries have not used the “long boom” to restructure their national budgets. This is stupid stuff, because the long upswing never occurred there. Europe, mainly because of its inappropriate fiscal rules, has not used this global upswing and is now entering a global crisis. The political situation in Italy, in particular, could now change dramatically and rapidly if the rest of Europe were to come down on the country again with the same old prejudices.

A serious misunderstanding also underlies the ECB President’s statement last week. She apparently believes that the ECB is not responsible for the long-term interest rates of the member states and the spreads between the interest rates of different member countries. However, this is precisely what the ECB is responsible for – and not only in times of crisis, but always. Because the capital markets operate without any rationality, the ECB must never leave the field to these markets. The fact that even today, after all the experience of recent years, Ms Lagarde’s advisers are unaware of this is more than shocking.

This crisis, like many other crises before it, shows that every society needs a state that is capable of acting and is competent. The liberal idea of a state that is to be kept permanently small is once again proving to be absurd. It also shows that the privatisation of all areas of life makes no sense at all, because private operators of health-care facilities are not prepared to maintain expensive capacities that are only needed in the event of a crisis. Now the whole economy must be slowed down in order not to overstretch the technical and personnel capacities in the hospitals, which are limited because of the profit imperative of privatisation. This is the only way to cope with bottlenecks in the short term, but it cannot be a model for the future.

No outlook

With the current uncertainty, it is not possible to plan beyond the day. No one can predict with sufficient certainty whether the measures now being put in place are really sufficient to slow down the spread of the virus or whether improvements will have to be made. That is why it is also very problematic to create horror scenarios or jump to any conclusion at this stage. If two months are not enough, four months can be bridged in the same manner. What happens after that, you have to decide when you have more information available.