What Next?: Attention Slowly Turns to the Mother of All Coronavirus Questions
But the state governors are not acting on their own. State and federal leaders are constantly taking part in conference calls about the situation. Thuringia Governor Bodo Ramelow, who is working from his lakeside vacation home these days, said he participated in eight conference calls last Sunday alone, two of them with members of his state cabinet and one with the Chancellery in Berlin. Ramelow is also listening to the advice of hospital hygienist Klaus-Dieter Zastrow. But, Ramelow says, not every expert recommendation is feasible. Ramelow says that Zastrow, for example, recommended that all people should be wearing masks. That, though, is something of a non-starter, the Thuringia governor says. “There aren’t even enough masks for hospital personnel.”
A look at the daily situation report from the Thuringian crisis team illustrates the dilemma. On Tuesday, the report noted that first-aid and emergency medical care was within days of collapse. There was a lack of protective equipment, the report noted, adding that in one municipality, the situation was particularly dire.
But Ramelow had a bit of luck in an unfortunate situation. In the middle of last week, 100 tons of face masks from Russia arrived at the airport in Erfurt. There were some difficulties with customs because the masks lacked the CE marking that the EU requires for certain products. So, Ramelow personally drove to the custom’s office and the cargo finally got released. The whole world, it seems, is improvising these days.
‘We’re at the Beginning of the Wave’
This is also true in Baden-Württemberg, where Stefan Brockmann is something akin to the state’s chief epidemiologist as the head of the Department of Health Protection and Epidemiology in the State Health Office in Stuttgart. Brockmann says there were more than 8,000 infected and 76 deaths in Baden-Württemberg as of Thursday. “We’re still at the very beginning of the wave,” he says.
At the earliest, we’ll see this weekend whether the state government’s measures have been successful, he says. “If we’ve managed to slow the infection curve by isolating ourselves, that would be a partial success.” He says state officials will have to keep adjusting their measures based on the data. He adds that there needs to be a controlled rise and fall in infections in order to immunize the population and flatten the curve. Brockmann says he doesn’t have the impression that politicians have grasped this. He says there’s an erroneous notion out there that you can just sit the virus out like some passing storm.
The world is heading into uncharted territory, and the visilibity is poor. Many have already given up hope that Germany will look the same after the virus as it did before. Pandemics are merciless in exposing weaknesses that often lay dormant and unnoticed in everyday life. The coronavirus has unleashed a perfect storm, because the reaction to the epidemic is also creating a crisis.
The world has come to a standstill and the images it is producing are a horror for the business world, for big and small companies alike. From one day to the next, airlines and hotel and restaurant chains began to fight for their very survival. The World Tourism Organization warned this week that 75 million jobs in that industry alone could be threatened. Car factories lie idle, supply chains have broken down in the textiles industry, taxi drivers have been hit as have waiters, hairdressers and corner store owners. Soon, entire economies will be deeper in debt than they’ve ever been. Who’s going to keep an overview of everything that goes on in this storm? And how?
Even in the best of times, Philipp Steinberg has one of the toughest jobs at the German Economics Ministry. He’s tasked with forecasting the future. The ministry’s chief economist is responsible for forecasting how Germany’s gross domestic product will grow. He gets help from some of the smartest economic scientists in the country, the German Council of Economic Experts, who provide him with data and analysis.
Before the coronavirus hit, he had been preparing his next forecast for April — and the numbers had actually looked really good. Steinberg expected a slight upswing. But now, the experts no longer speak in terms of figures. Our economic future is now being described in the form of three letters — V, U and L — each of which represents a different scenario.
The letters refer to the shape of curves in a coordinate system, a mathematical picture of economic development. An L would be a disaster: a steep fall and a long and drawn-out depression. A U would also mean poor prospects. The turnaround at the lower end of the letter can be translated as a long, painful reversal of the trend before the economy starts to pick up again.
It’s also possible the best-case scenario will occur — the V. It entails a steep plunge followed by an immediate upswing. Members of the Council of Economic Experts have informed Steinberg that they consider this to be the most likely scenario. But faith in that theory isn’t universal. Indeed, one saying seems to ring true: Ask three economists a question and you’ll get four answers.
Economy Could Shrink by 5 to 20 Percent
At the moment, the assessments are fluctuating even more wildly than normal. The Council of Economic Experts that formally advises the government is forecasting 5 percent negative GDP growth. Meanwhile, the Kiel Institute for the World Economy (IfW) is estimating 9 percent negative growth. The Ifo Institute in Munich is warning that GDP could collapse by as much as 20 percent. That would be tantamount to an economic meltdown, comparable to the crises that Eastern and Central Europe experienced after the collapse of the Soviet Union.
Ifo is calculating that the shutdown of industry, trade and services will cost 40 to 50 billion euros for each week it continues. Will these costs rise further if the crisis persists? Or will they at some point soar exponentially through the roof like the number of coronavirus infections? And is it possible that the economy could reach a tipping point where it becomes so paralyzed that it’s no longer possible to get it moving again? And what does it mean when the chief buyers from 5,000 European companies announce, as they did on Tuesday in a monthly survey, that they are expecting the biggest economic crash in the index’s history?
Steinberg and his staff are also being presented with other theories, including one that could be described as “habituation.” It entails companies learning to live with the shutdown. Car companies could organize manufacturing in ways that would keep workers at a sufficient distance from each other. Supply chains could also be organized despite all the hindrances. But who really believes that?
Anything Beyond April Would Be Severe
At the Economics Ministry, officials only have one ear to the cacophony of experts right now. The emergency aid and loan programs were necessary, even if it’s still not clear whether the economy will shrink by 5 or 15 percent. But does this really mean that the government has been making decisions in the dark? “Not in the dark,” says Economics Minister Altmaier. “The chancellor would say: We have to make an open decision.”
Officials at the ministry assume the economy would survive the closures to a certain extent if they were eased again at the end of April. Anything that goes beyond April, though, would be severe. Most importantly, it would be incalculable, because economists’ models aren’t designed for scenarios that long. “We would have to know how far the virus has spread among the populace,” Altmaier says. “One would also have to have this information regionally, in order to then lift the initial restrictions again in a targeted manner.”
Officials in the Finance Ministry have already evaluated everything they could find on the economics of a shutdown, i.e. an unexpected event that forces parts of the economy to be temporarily halted. If the crisis lasts longer than a few weeks, the results are very sobering. If larger parts of the economy have to be shut down for two or three months, many companies will no longer be able to cope with the losses. At that point, the government would have to pay part of the operating costs in order to save as many businesses from bankruptcy as possible. Otherwise it wouldn’t be possible to kickstart the economy again once the pandemic is over.
Finance Minister Olaf Scholz and his staff have calculated that if the shutdown results in a 20 percent drop in German economic output over three months, GDP would fall by around 5 percent for the year. If the government were to offset two-thirds of that sum, it would come with a price tag of 125 billion euros. To err on the side of caution, the special budget Finance Minister Olaf Scholz presented this week assumes GDP will shrink by 6 percent. This pushed up costs of financing the bailout to 156 billion euros.
It may sound like a massive amount of money, but it’s actually a manageable sum for a major economy like Germany’s. During the course of the financial crisis, the German government in 2009 spent more than 200 billion euros in order to cushion the blow of the global recession. The national debt at the time rose dramatically from 65 percent to 82 percent of GDP. It was a tremendous burden, but it ultimately proved bearable. Seven years later, the German government had paid off the debt.
Whether it can succeed this time hinges on a number of questions for which no one has any reliable answers right now. Is the damage that has been caused by the coronavirus greater than assumed because the pandemic has interrupted more deliveries and transports than previously thought? Will the economic shutdown, which was designed to prevent hospitals from being overwhelmed, have to be repeated, perhaps even several times? And what happens if the production outages lead to a financial and banking crisis that pulls eurozone countries like Italy and Spain into the abyss? Would Germany then have to be liable for the monetary union?
It’s Tuesday, and the man who should have the answers to questions like these is standing on a shopping street in Berlin’s Prenzlauer Berg neighborhood. It’s early evening, and it’s the first time Wolfgang Schmidt hasn’t been in his office until midnight. He’s instead spending a few hours with his family. A trendy, well-situated neighborhood that is usually teeming with life is just as dead as the rest of the country. Businesses are closed and the streets are empty.
‘The Crisis Will Change the Country’
Schmidt is a state secretary in the Finance Ministry and has been Olaf Scholz’s closest confidant for years. He says he’s hopeful that a country that has been shut down can soon start moving again, but he’s not sure. There’s only one thing he’s certain about: “This crisis will change the country.” Schmidt experienced the steps taken during a number of major events in recent years as Scholz’s right-hand man. He was there during the 2009 financial crisis, when then-Social Minister Scholz suddenly had to take charge of hundreds of thousands of workers who had been sent into the short-time work program, a government subsidy that picks up labor costs for workers so that their employers don’t lay them off. And during the refugee crisis in 2015, when Scholz, as mayor of the city-state of Hamburg, represented the interests of the states governed by leaders in his Social Democratic Party.
Now, he’s one of the top officials in Scholz’s ministry and also one of the government’s most important crisis managers. He’s steering the work on the billions of euros in state aid his boss announced earlier this week. He also maintains close contact with Chancellery chief Helge Braun, who is coordinating Chancellor Angela Merkel’s crisis program together with the state governors.
Schmidt has experienced some hectic phases in the government, but the coronavirus presents an entirely new dimension of crisis. He says there are “countless fires” to be put out, because “many industries are affected at the same time.” On top of that, he says, Berlin “always needs to be thinking about Europe” as a whole. Schmidt rejects accusations that the government underestimated the virus. He says the real problem is a different one. “The pandemic is developing exponentially, but we all think in linear terms.”
The German government began preparing its first bailout package for businesses at the beginning of March. To compensate for possible corona-related losses, affected companies were provided with easier access to the government’s short-time work program and they could also apply for large-scale loan assistance. There had been talk of a large package, but a few days later it was clear that the hastily compiled aid measures were at best a start.
Schmidt then invited a group of prominent economists to the ministry, to discuss the quickly escalating crisis, including Clemens Fuest, Gabriel Felbermayr and Marcel Fratzscher. The group quickly concluded that the measures taken by the government were a step in the right direction, but they didn’t go nearly far enough. The planned liquidity support also may “prove to be insufficient,” a paper by the professors stated. They wrote that the measures would need to be supplemented with tax cuts and, as a last resort, a rescue fund for companies. Shortly afterward, Merkel and Germany’s 16 state governors made the decision to send the country into quarantine. At that point, it also became clear to the experts in Schmidt’s ministry that the government had to increase the size of its bailout package again and that it needed to be a lot bigger. Now, small businesses and self-employed people were to receive direct grants and not just loans.
The government is also setting up a fund that will enable it to buy shares in companies struck by the coronavirus so they don’t go out of business. It has also cleared the way for people with marginal employment and freelancers to obtain welfare benefits without a major review of their assets. Essentially, in one fell swoop, the German government has introduced an unconditional basic income, at least for the time being.
A 1.8-Trillion-Euro Bailout Package
Another thought also guided the government: To reassure the people and the financial markets, the program needed to have the necessary impact. “During the euro crisis, we experienced what it was like as a government to be constantly playing catch-up,” says Schmidt. The federal government has now agreed on a package comprised of loans and guarantees with a total value of up to 1.8 trillion euros.
There has never been a program like this in Germany’s history. The state has essentially transferred the entire economy into the intensive care unit. In thousands of companies, a portion of wages will now be paid by the government. Industries like tourism and aviation will be kept afloat with public loans. And in companies that have been worst hit, the government now has the possibility of taking stakes in order to keep them from going under. Now, the question is whether these measures go far enough and for how long the economy — and the government, for that matter — can endure. Weeks? Months?