Economic Outlook

Michael Hüther, director of the German Economic Institute in Cologne, considers Germany’s response to the corona crisis and the direction the economy will take.

October, 2020

What did Germany get right in its economic response to corona?

We have to remember that there is no purely financial or economic reason for this crisis. At the root of the last financial crisis in 2008 was mismanagement of financial markets and a lack of coordination, which led to a massive loss of trust, and that had a commensurate effect on the system. And the decline went on through Q4 of 2008 into Q1 of 2009.
The situation in the first half of 2020 was different because the decline was a straight plunge down – almost as if someone used a ruler – because of the lockdown. And this time the government reacted correctly in various phases.

First, it ensured stable corporate liquidity in March and April. That also applies to the furlough program. Then, during the second phase, it looked at preserving supply chains with an eye towards Europe, but also via interventions with the Economic Stabilisation Fund. Then, on June 3, it passed a stimulus package to address a situation where demand has fallen. The instruments and the timing were both well chosen.

Was any one instrument particularly important?

The furlough program was certainly important. It was introduced and tested out during the financial crisis (2008 – 2009). A lot was done in credit availability, which I also see as important. And now there is a surprise VAT cut of EUR 20 billion in the second half of 2020, which is helping to provide economic impulses. We are going well beyond what was in both economic packages 10 years ago.

Is Germany making sufficient progress on issues like digital infrastructure and climate-friendly technology?

Firstly, economic stimulus policy is not structural policy. The first part of the June 3 package was about stimulating the economy, which was the right way to go. Economic stimulus has to be timely, targeted and temporary. That has been the case, so it should be effective.

Secondly, in May, some colleagues and I presented a second program to stimulate growth. It includes electric vehicle charging infrastructure, hydrogen strategy and 5G – these are the structural elements that will be needed in the mid-term and that will last well into 2021 and 2022.

How is Germany trying to attract foreign investors?

The government is trying to create favorable conditions for Germany as a business location. Part of the stimulus package is that we’ll be reviewing our entire business tax legislation. Efforts to reduce bureaucracy have been going on for years. And then there’s the support for research and development. These are all important elements.

Foto: Michael Hüther / © Institut der deutschen Wirtschaft