The Impact of COVID-19 on the German Economy

The COVID-19 epidemic has hit the traditionally extroverted and export-dependent German economy, reducing international demand for capital goods and mechanical equipment.

According to estimates by the prestigious Munich Institute for Economic Research Ifo, in the first quarter of this year Germany’s GDP fell by 1.9%, while in the second quarter the recession is estimated to have jumped to 12%. Overall, for the current year it is estimated that the German economy will face a recession of 6.2%.

In terms of employment, Ifo estimated the impact of the pandemic and the ensuing financial crisis on a loss of 340 thousand to 750 thousand full-time jobs, depending on the duration of the lockdown and the speed of economic recovery.

There will be similar effects on public finances, as the decline in private consumption, shrinking investment, drastic reduction in turnover and corporate profitability will have a direct impact on public revenues.

In order to mitigate the economic impact of the pandemic, the federal cabinet decided on March 23rd to set up a special “Economic Stabilization Fund” with a total budget of 600 billion euros to support domestic businesses, workers and freelancers. professionals.

The German government has set up an intervention program that includes measures to boost business liquidity, through fast-track lending programs guaranteed by the state investment bank KfW, tax relief measures, easing part-time or flexible employment restrictions and payment.

At the same time, the federal government submitted a draft supplementary budget that provides additional spending of 122.5 billion, based on scenarios of an estimated recession of 6.5% of German GDP for the current year.

Government funding programs for corporate liquidity and jobs raise the projected public spending target for 2020 from 362 to 484 billion, thus bypassing the constitutionally enshrined principle of balanced budgets and at least temporarily abandoning the policy. Schwarze Null – ie zero budget deficits.

Prudent fiscal management, which has reduced, for example, public debt from 81% in 2012 to around 60% in 2019, now allows Germany to spend huge amounts of money and resources on tackling the pandemic.

Total public spending and tax breaks to address the crisis have already reached 6.9% of GDP, while available government loan guarantees to businesses reach 38.6% of GDP.

The Council of Economic Experts for the Monitoring of the German Economy – the so-called Committee of Wise Men – has published a study on the effects of the pandemic and the prospects for economic recovery.

This study proposes a broad public investment program, tax cuts, a large increase in research and development spending, faster digitization of services, businesses and public administration, and a shift in working relationships to the transition to teleworking models that are necessary in a restricted environment. traffic and compulsory social distancing.

In early June, the federal government announced an additional $ 130 billion development plan to revive the German economy.

This program includes measures to boost domestic demand, such as reducing VAT rates by the end of 2020 from 19% to 16% for the general rate and from 7% to 5% for basic necessities, establishing a ceiling on social security contributions, new tax measures to boost business liquidity over the next two years, a part-time payroll program, boosting tourism and gastronomy businesses and providing financial support to tax-exempt communities .

At the same time, the federal government approved a program of strategic importance for the modernization and long-term support of the German economy of 50 billion, which aims mainly at the faster transition to the green economy and the new digital age, as well as the strengthening of the public health system and relocation of pharmaceutical and sanitary production units in Germany.

In addition, a € 2 billion program is planned to support startups operating in Germany, with the aim of maintaining technological advancement and securing jobs with very high added value.

In total, the amount of state aid for the recovery of economic activity, including extensive tax relief and government guarantees to support and safeguard the international creditworthiness of the state investment bank KfW, is estimated at 1.3 trillion euros.