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Germany's Economy Is A Bigger Risk Than Ever For EU Stability

Germany has the resources to weather the storm, but not everyone in Europe is convinced that's a good thing.

In Berlin on April 17
In Berlin on April 17
Tobias Kaiser

BRUSSELS — No country in Europe is in a better position than Germany when it comes to funding domestic economic recovery. But in Brussels, Rome and Madrid, politicians see that as a potential problem: They're worried that less economically stable countries might be left behind by the coronavirus pandemic, and that Germany and other countries with strong economies will widen the gap between themselves and the rest of the EU.

That a country has enough money to spend its way out of a crisis would seem to be good news. Elsewhere in Europe, though, policymakers are watching with mixed feelings as Germany spends hefty sums to support domestic companies and workers through the lockdown. And now, as result, the European Commission is blocking Germany from making its own decisions about state aid.

Historians may well tell us that epidemics in the past have tended to reduce financial inequality within societies, but the European Commission expects the opposite to be true in Europe.

Everyone must play by the same rules.

"It is extremely important to ensure that this crisis doesn't exacerbate economic, social and political differences between countries and regions," warned Valdis Dombrovskis of Latvia, the European Commission's executive vice-president for an economy that works for people.

European Commissioner for Economy Paolo Gentiloni has repeatedly insisted that "everyone must play by the same rules' as Europe emerges from lockdown. The European Commission has long called for a level playing field when it comes to access to the Chinese market, or a Brexit agreement that doesn't involve fiscal, social and environmental dumping. But this is the first time this call has been implicitly aimed at Germany.

A privileged position

Economists say the concerns among EU commissioners are well grounded: Europe's national economies are not all equally well prepared to deal with the economic consequences of the pandemic. Germany has enjoyed a boom decade of economic growth, while Italy's economy has hardly grown at all over the last 20 years.

The worry is that the crisis will only widen the gap, as richer countries such as Germany, the Netherlands and Austria can afford to pump a lot of money into their national economy to see it through the pandemic. Last year, Germany's national debt fell below 60% of GDP, the level set out in the Maastricht Treaty, and before the crisis the social security office was sitting on reserves reaching into billions of euros.

The countries of southern Europe don't enjoy the same kind of financial security. They are still working to reduce their levels of debt from the 2008 financial crisis, and therefore can only offer limited support for domestic companies and workers.

This means that the response other countries have to the crisis pales into insignificance compared to the reaction from Berlin. Germany's economy represents a quarter of Europe's GDP, but according to data from the European Commission, Berlin is responsible for more than half of the government aid that has so far been approved by EU countries.

In a comparison of EU countries, global forecaster Oxford Economics concluded that Germany's state aid was disproportionately large: "Overall, Germany's response has been by far the most far-reaching. That means they have established a good starting point for recovery," the analysts write. The Netherlands and Ireland have approved similarly extensive rescue packages.

Statue with a face mask in Brussels — Photo: ål nik

But the countries with economies that have been hit hardest by the virus — such as Greece, Italy and Spain — have so far been able to offer relatively little financial support. According to Oxford Economics, these countries could lose more than 12% of their GDP, whereas the Netherlands stands to lose around 9% and Germany around 10%.

On Wednesday, the European Commission is due to publish its forecast for economic development this year, an opportunity to analyze the effects on different economies afresh. The Commission and the governments of countries such as Italy and Spain are worried that over the next few months, German, Austrian and Dutch companies that have benefited from state aid could encroach on their domestic firms' market share, or buy them up completely.

It is extremely important to ensure that this crisis doesn't exacerbate economic, social and political differences.

At a recent shareholders' meeting, Lufthansa CEO Carsten Spohr had to emphasize that his company has no intention of buying rivals that have fallen on hard times. That same week, an Italian union member representing the beleaguered airline Alitalia called for pre-virus market shares to be preserved after the pandemic.

Legitimate concerns

The European Commission is concerned that the various national economies could drift so far apart that the Eurozone or even the whole EU could collapse. This fear is intensifying the debate around the European economic recovery fund, which will release 1.5 billion euros of support for EU economies. The Commission is due to set out detailed proposals for the project next week.

Until then, the war is being waged elsewhere. Germany and Austria are arguing that they should be allowed to support their own domestic companies as they see fit. The European Commission disagrees.

It is true that Margrethe Vestager, European commissioner for competition, has already relaxed the strict rules on state aid and waved through dozens of emergency financial aid programs. This week she will most likely approve the German Economic Stabilization Fund, but she is reluctant to make any further concessions to the German government.

German Minister for Economic Affairs Peter Altmaier would like to offer companies at risk of bankruptcy loans that are 100% guaranteed by the state, but Vestager is against this. In the European Parliament last week she said the German state could guarantee loans of up to 800,000 euros at 100%, but not any larger sums.

That has been met with surprise in Berlin. In mid-April, Altmaier wrote to Brussels asking for more flexibility around financial support measures and permission to fully guarantee loans. "Stabilizing the German economy is also in the European interest," he wrote.

Altmaier also addressed fears about inequality after the pandemic. He sees Germany's role as one of protection, writing that Europe will only be able to "guarantee a level playing field on the global stage" if German companies are strong enough.

Austrian Minister of the Economy Margarete Schramböck and Minister of Finance Gernot Blümel have also written to Vestager asking the European Commission to set aside all rules on state aid during the crisis. They claim this flexibility is necessary to allow governments to respond quickly.

"Austria and other countries would like to be able to do as they see fit when it comes to state aid, without having to go cap in hand to Brussels," said German MEP Andreas Schwab (CDU), the European People's Party Group coordinator on the Committee on the Internal Market and Consumer Protection.

Germany's role as one of protection.

He regrets Vestager's decision to block the German government's move to fully guarantee loans, which he sees as urgently necessary. But he also thinks the accusations from Berlin and Vienna are an overreaction.

"The Commission is trying to make sure that EU countries don't have vastly different conditions when they begin trying to restart their economies. Those are legitimate concerns, but I don't expect the Commission to be led by such political considerations when making decisions about state aid," he said.

Vestager too is aware of how complex the situation is, but said there's no question that if it's able to recover quickly, Germany — the continent's largest economy — will benefit other EU countries.

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Shelling in Kherson

Anna Akage, Bertrand Hauger and Emma Albright

While retreating from Kherson, Russian troops forcibly removed more than 2,500 Ukrainians from prison colonies and pre-trial detention centers in the southern region. Those removed included prisoners as well as a large number of civilians who had been held in prisons during the occupation, according to the Ukrainian human rights organization Alliance of Ukrainian Unity.

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