A Brief Moment of Reflection

The world has changed dramatically over the past few weeks: countries everywhere have issued exit restrictions, many companies have halted operations, stock exchange markets are in turmoil, economic forecasts range from bad to terrible, and governments have approved unprecedented rescue packages. 

Economic crisis management – stabilising companies and markets – is on the right track in Germany. The federal government has employed several strategies that proved to be helpful during the financial crisis of 2008/09, such as instituting short-time work schemes and granting loans and loan guarantees to companies. The particular challenge posed by the coronavirus pandemic lies in handling the enormous number of applications for assistance, which dwarfs those experienced during the financial crisis.

What is new are Germany’s measures to help small businesses and self-employed workers, who can now receive direct grants from federal and state programmes. Unlike the 2008/09 financial crisis, which at first hurt banks and several major companies, the economic shutdown precipitated by the coronavirus pandemic affects everyone straight away.

Another new development is that the federal government is keeping open the option of partly nationalising large companies. During the financial crisis, Germany took this step only in the banking sector, as it did with Commerzbank. Now it is considering the purchase of ownership stakes in companies selling real-sector goods and services. The recently established Economic Stabilization Fund reserves up to 100 billion euros for this purpose. The recovery of the post-crisis economy will much depend on companies’ levels of debt and state ownership; restructuring, at any rate, will be difficult. The crucial factor is how much capital each company receives and under what conditions. Experience from the financial crisis shows that a panel of experts tasked with the development of criteria for allocating funds and of plans for rolling back aid measures after the crisis may prove helpful in this respect.

Europe has now come up with a joint response. At the European level, the ECB has massively expanded its bond-buying programme and has pumped extra liquidity into the banks. This will help Italy, Spain and other highly indebted countries get their interest rates under control. Increasing the European Investment Bank’s funds to provide loans for companies, and introducing a wage-subsidy scheme across Europe, are having a targeted effect in those regions that are particularly hard hit by the crisis. Furthermore, the European Stability Mechanism (ESM) is being activated to provide assistance to countries with high debt levels.

Now with the emergency measures underway, we can take a moment to look forward. The economy is now gradually reopening. Economic stimulus packages will be necessary, also at European level, but there is still time for that. A return to normal is not yet in sight.