Germany is the largest economy
in the euro zone.
It has suffered fewer coronavirus-related deaths
than its neighbors
and it never had to institute
a full lockdown.
But it hasn’t escaped the pandemic unharmed.
In fact, the country was already facing a recession
before the coronavirus outbreak
and the health emergency has deepened
its structural weaknesses.
With disruption in its crucial
automotive sector,
uncertainty in global supply chains,
and a wider slowdown in the euro area,
the country is set to face its steepest decline
since the Second World War.
So, what does the future hold for Germany?
For most of the last decade,
Germany delivered record-high employment
and stronger economic growth
than its European partners.
But this performance had been slowing
over the last two years.
Since the financial crisis in 2008, 2009
Germany had been flourishing,
so strong growth,
very strong labor market.
But then since mid-2018
the backbone of the German economy,
the industry,
started to slow down already.
Why?
First, global trade conflicts
were taking their toll
on the critical manufacturing sector.
Automakers in Germany export 77%
of locally manufactured cars,
or 60% of the total number of cars
exported from the EU in 2019.
Besides slowing demand from China
even before the pandemic,
the threat of new tariffs from the United States
hung overhead like a looming cloud.
The automotive industry was also recovering
from the Volkswagen diesel scandal,
which had affected the industry’s reputation.
We were already in the middle
of an industrial recession
when the Covid-19 crisis
hit the German economy.
In addition,
the German government was reluctant
to increase its expenditure
and invest in public infrastructure.
The overriding aim in Berlin was to
deliver sound public finances by not spending
more than the government received in tax revenue,
also known as the “Black Zero” rule.
This meant that digitalization and public infrastructure
were not getting as much investment.
We had an intensive debate in Germany about
infrastructure investments, public investments,
because we saw there is a big gap
in our infrastructure quality.
So for example, mobile phone connections didn’t really
work well,  the railway system was in pretty bad shape.
Tax revenue is so high
we ran surpluses in four or five consecutive years.
People were saying ‘we have enough tax revenue,
it is just spent on the wrong priorities’.
Everybody agreed 'we should have
more investment,
but we should finance that by
cutting back other types of public expenditure'.
And then the coronavirus hit Europe and suddenly,
Germany was facing even deeper economic troubles.
When you look at the Germany economy right now
and the lifting of the lockdown measures,
it is leisure, it’s the tourist industry,
they are not really lifting off
and they are clearly in crisis mode.
While some parts are rebounding,
I think especially the automotive industry has become
more or less the example of structural weaknesses,
which are now somehow enhanced and strengthened
by the Covid-19 crisis.
The disruption to global supply chains
has hit Germany hard.
Factories have been shuttered or are running
at reduced capacity to ensure social distancing,
borders have been mostly closed,
while air and sea freight capacity have decreased.
This is a big issue for Germany because
international trade is crucial
for its export-oriented economy.
Not being able to sell its products abroad
or facing delays in getting materials
poses a massive challenge.
In fact, German exports fell by 24%
month-on-month between March and April.
Over the same period,
imports decreased by 16.5%.
This was the strongest month-on-month decline in both
exports and imports since Germany's reunification.
This has meant that Germany’s
widely criticized trade surplus,
often a target of U.S. President Donald Trump,
shrank to its lowest level since December 2000.
However, recent data has shown
there may be brighter prospects for trade.
An index tracking the manufacturing
and services sectors
showed business activity rebounding in May
as Germany eased some social restrictions.
However, it is still a far cry
from pre-crisis levels.
The uncertainty has been a nightmare
for manufacturers, says Thilo Brodtmann,
the executive director of the
Mechanical Engineering Industry Association.
For the mechanical engineering industry,
which has in Germany one million people employed,
the good news is that there has never been
a real lockdown,
so there was always a bit of base business,
which now seems to be accelerating a bit again.
The bad news of course is that there is
a deep cut to what we thought would happen.
We already started into the year
without being too optimistic about that,
we thought maybe a decrease of 5%.
But that was before corona.
So after corona it’s going to be
much, much worse.
Against this backdrop,
the German economy could contract 7% in 2020.
How it recovers will depend on
the government response to the crisis.
So far, Berlin has announced
the biggest fiscal stimulus package in Europe,
tearing up years of
balanced budget policies.
It has adopted more than €450 billion
so far in direct fiscal stimulus measures,
the highest amount compared to any
of its European peers.
Germany essentially tailored
the biggest rescue package worldwide
so that was a pretty drastic shift
in German public finances.
The black zero type of politics,
essentially that put us in a position to now go all in.
And to prevent job losses, Germany has a
state-sponsored program, called Kurzarbeit,
that incentivizes companies
to reduce their employees’ working hours
instead of laying them off
through the form of wage subsidies.
During the global financial crisis,
Germany was the only G7 country
that managed to keep employment stable
despite a contraction in its GDP,
thanks in part to its Kurzarbeit program.
As Kurzarbeit applications rise during the pandemic,
tweaks have been made to the program
to make it attractive to employers and employees,
such as more generous wage subsidies
and the waiver of social security contributions,
among others.
Economists believe that Germany will continue
to outperform other European countries,
but much of its success will depend on where
the government invests over the coming years.
The pace of recovery in Germany will
also depend on its neighbors.
In May, Germany backed a massive fiscal
stimulus package for the European Union.
Up to €750 billion could be made available
starting in January 2021
to steer the 27-member bloc
out of the worst economic crisis in its history.
Germany will get out of this crisis faster and initially
also stronger than most other European countries.
But the structural weaknesses
have not all of a sudden disappeared,
they are all still there, so this would clearly
put a cap on the speed of the German recovery.
As the Germany reopens,
its reliance on exports
and its exposure to international trade
leave it in a precarious state.
If this new fiscal stimulus package,
and it is actually tackling a couple of these factors,
so if it’s successful and would also lead to
more stimulus in the years ahead,
then these hurdles won't be hurdles anymore.
If this fiscal stimulus will only
be a flash in the pan,
then obviously the problems we talked about
prior to the crisis will very quick remerge
and will limit the potential for a strong recovery.
Hi everyone.
What do you think will happen
to your own country's economy?
Let us know in the comments section,
and as always, don't forget to subscribe.
I'll see you soon.
