Economy

Germany’s Economy Simply Cannot Afford Another Lockdown

What the country needs now is more targeted measures and clearer priorities from its politicians, as well as more effective communication.

A worker at Volkswagen's Wolfsburg factory
Olaf Gesermann

BERLIN — "We certainly wouldn't survive a total lockdown again."

The grim warning doesn't come from someone whose profits have taken a significant hit during the coronavirus crisis. Quite the opposite: Joe Kaeser, head of Siemens, has emerged from the first wave of COVID-19 infections "almost unscathed," with the Munich-based company even increasing its market share during the pandemic.

So if he sounds so pessimistic, imagine what hard-hit industries have to say about the prospect of a second lockdown then? For example, the metal industry and the airlines ... What about the small businesses without significant cash reserves? What about the start-ups, for whom calls from investors have suddenly dried up?

Many economic indicators show that the country is recovering quickly after the initial crash: Incoming orders are growing, and the business climate index for small and medium-sized companies is improving. However, it would be easy to underestimate how precarious the economic situation still is. If the economy doesn't keep on stabilizing, we could see bankruptcies and redundancies on an unprecedented scale.

What about the start-ups whose calls from investors have suddenly dried up?

All of which means that Kaeser is right: There's no use performing a surgical operation if the patient is dead. Minimizing the health risks as much as possible without taking into account the costs for the economy is not a viable political option.

German citizens queuing at a socially-safe distance — Photo: Sachelle Babbar/ZUMA

If Germany does experience a second wave of infections soon, it must avoid the blanket lockdown that was in force through March and April. Instead, the government should introduce new, more intelligent measures, which take into account what we have learnt over the past few months. For example, Germany has succeeded in protecting older citizens, who are at particularly high risk from the virus. In the week before Easter, some 25% of all the infected were people over 70 years old. Now it is only 7%.

That is a significant reason why the coronavirus mortality rate in Germany has been three times lower than the EU average — and almost 50 times lower than in the U.S. If there is a second wave, senior citizens and other high-risk groups could be protected in a more targeted way so that the rest of society does not have to face such harsh restrictions.

We could see bankruptcies and redundancies on an unprecedented scale.

The German government must also re-evaluate its priorities. We can't have another situation where nurseries and schools are the first to close and the last to reopen. And finally, the authorities must communicate more clearly. So far, with a few exceptions, the government and the German center for disease control didn't need to do much to convince citizens to abide by the regulations. But this work is now more urgent than ever, as people are growing tired of social distancing and opinions are becoming more entrenched.

In the past, the German government managed to push through unpopular decisions (joining the euro, avoiding a Greek exit from the single currency through offering billions of euros of loans and welcoming hundreds of thousands of refugees into the country) even when a significant minority of citizens were unhappy with these developments. But the efforts to combat the coronavirus would be significantly undermined if the measures were met with widespread opposition. Politicians love to talk about getting the people on board. They now have an unprecedented opportunity to do so.

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Economy

European Debt? The First Question For Merkel's Successor

Across southern Europe, all eyes are on the German elections, as they hope a change of government might bring about reforms to the EU Stability Pact.

Angela Merkel at a campaign event of CDU party, Stralsund, Sep 2021

Tobias Kaiser, Virginia Kirst, Martina Meister


-Analysis-

BERLIN — Finance Minister Olaf Scholz (SPD) is the front-runner, according to recent polls, to become Germany's next chancellor. Little wonder then that he's attracting attention not just within the country, but from neighbors across Europe who are watching and listening to his every word.

That was certainly the case this past weekend in Brdo, Slovenia, where the minister met with his European counterparts. And of particular interest for those in attendance is where Scholz stands on the issue of debt-rule reform for the eurozone, a subject that is expected to be hotly debated among EU members in the coming months.

France, which holds its own elections early next year, has already made its position clear. "When it comes to the Stability and Growth Pact, we need new rules," said Bruno Le Maire, France's minister of the economy and finance, at the meeting in Slovenia. "We need simpler rules that take the economic reality into account. That is what France will be arguing for in the coming weeks."

The economic reality for eurozone countries is an average national debt of 100% of GDP. Only Luxemburg is currently meeting the two central requirements of the Maastricht Treaty: That national debt must be less than 60% of GDP and the deficit should be no more than 3%. For the moment, these rules have been set aside due to the coronavirus crisis, but next year national leaders must decide how to go forward and whether the rules should be reinstated in 2023.

Europe's north-south divide lives on

The debate looks set to be intense. Fiscally conservative countries, above all Austria and the Netherlands, are against relaxing the rules as they recently made very clear in a joint position paper on the subject. In contrast, southern European countries that are dealing with high levels of national debt believe that now is the moment to relax the rules.

Those governments are calling for countries to be given more freedom over their levels of national debt so that the economy, which is recovering remarkably quickly thanks to coronavirus spending and the European Central Bank's relaxation of its fiscal policy, can continue to grow.

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive.

The rules must be "adapted to fit the new reality," said Spanish Finance Minister Nadia Calviño in Brdo. She says the eurozone needs "new rules that work." Her Belgian counterpart agreed. The national debts in both countries currently stand at over 100% of GDP. The same is true of France, Italy, Portugal, Greece and Cyprus.

Officials there will be keeping a close eye on the German elections — and the subsequent coalition negotiations. Along with France, Germany still sets the tone in the EU, and Berlin's stance on the brewing conflict will depend largely on what the coalition government looks like.

A key question is which party Germany's next finance minister comes from. In their election campaign, the Greens have called for the debt rules to be revised so that in the future they support rather than hinder public investment. The FDP, however, wants to reinstate the Maastricht Treaty rules exactly as they were and ensure they are more strictly enforced than before.

This demand is unlikely to gain traction at the EU level because too many countries would still be breaking the rules for years to come. There is already a consensus that they should be reformed; what is still at stake is how far these reforms should go.

Mario Draghi on stage in Bologna

Prime Minister Mario Draghi at an event in Bologna, Italy — Photo: Brancolini/ROPI/ZUMA

Time for Draghi to step up?

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive. That having been said, starting in January, France will take over the presidency of the EU Council for a period that will coincide with its presidential election campaign. And it's likely that Macron's main rival, right-wing populist Marine Le Pen, will put the reforms front and center, especially since she has long argued against Germany and in favor of more freedom.

Rome is putting its faith in the negotiating skills of Prime Minister Mario Draghi, a former head of the European Central Bank. Draghi is a respected EU finance expert at the debating table and can be of great service to Italy precisely at a moment when Merkel's departure may see Germany represented by a politician with less experience at these kinds of drawn-out summits, where discussions go on long into the night.

The Stability and Growth pact may survive unscathed.

Regardless of how heated the debates turn out to be, the Stability and Growth Pact may well survive the conflict unscathed, as its symbolic value may make revising the agreement itself practically impossible. Instead, the aim will be to rewrite the rules that govern how the Pact should be interpreted: regulations, in other words, about how the deficit and national debt should be calculated.

One possible change would be to allow future borrowing for environmental investments to be discounted. France is not alone in calling for that. European Commissioner for Economy Paolo Gentiloni has also added his voice.

The European Commission is assuming that the debate may drag on for some time. The rules — set aside during the pandemic — are supposed to come into force again at the start of 2023.

The Commission is already preparing for the possibility that they could be reactivated without any reforms. They are investigating how the flexibility that has already been built into the debt laws could be used to ensure that a large swathe of eurozone countries don't automatically find themselves contravening them, representatives explained.

The Commission will present its recommendations for reforms, which will serve as a basis for the countries' negotiations, in December. By that point, the results of the German elections will be known, as well as possibly the coalition negotiations. And we might have a clearer idea of how intense the fight over Europe's debt rules could become — and whether the hopes of the southern countries could become reality.

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