Persistence in a Pandemic

As cases of Covid-19 surged again across the world last fall, German authorities took quick action to limit infection numbers. The measures were typical of Germany’s response to the unprecedented situation: attempting to balance economic concerns with necessary and timely health interventions.

 February, 2021

No one said it was going to be easy. After a summer when Germany largely succeeded in limiting the coronavirus pandemic, rising numbers of Covid-19 infections across the globe led German health experts and political leaders to decide that measures were needed to prevent a full-blown second wave.

In early November, restaurants, bars and cafes had to limit their service to takeout and delivery, while culture, recreation and sports venues were shut down, and tourist accommodation banned. These measures were stepped up in mid-December to include most retail businesses and in-person education.

But there were also glimmers of hope on the health front. Unlike many countries, Germany did not face a shortage of intensive care unit beds in hospitals. In late December, the European Union gave regular approval to the coronavirus vaccine codeveloped by German company BioNTech (see page 10) and Pfizer. The first inoculations commenced before the end of the year.

German governments at both the national and regional state levels were keen to make sure those businesses most affected would be able to bridge the economic gap created by the renewed Covid restrictions. An additional EUR 10 billion was immediately set aside to help them – on top of the unparalleled EUR 600 billion stabilization fund created in March. That fund was bolstered and extended as the lockdown continued. These preventative measures were applauded by the Organization for Economic Cooperation and Development (OECD).

»Germany’s response to the second wave of the coronavirus pandemic sought to keep as much of the economy open as possible. Not everything worked, but there are reasons to believe recovery will resume in 2021.«

“It’s certainly true that the quick work of the governments was a factor,” says Nicola Brandt, director of the OECD Berlin Centre. “But so were the credit guarantees for companies and the direct financial support. All that certainly helped. Taken together, these made up one of the biggest fiscal packages to bridge the pandemic in the whole OECD area.”

Proactivity and restraint

“In this serious situation, we are not leaving our companies and workers in the lurch,” said Minister for Economic Affairs and Energy Peter Alt­maier, as the new measures were announced.

Under the relief program, firms could apply for up to 75 percent of their 2019 November turnover in government aid, small companies were in line for one-off payments of up to EUR 10,000, and the self-employed were able to claim a one-off grant of EUR 5,000. Loans from the state-owned development bank KfW were extended and made available to companies with fewer than ten employees. Previously, value-added tax had been reduced from 19 to 16 percent through 2020 to encourage consumer spending. And the government also decided that its popular Kurzarbeit furlough program would be continued until the end of 2021 (see page 35). Under Kurzarbeit, the state temporarily covers the salaries of employees so that firms can retain their workforces.

Germany did not grind to a standstill. Most people continued to work, many in home offices, a solution born of necessity that worked better than anyone expected and even turned out to have considerable advantages. Initial predictions forecast less economic damage from the second lockdown than from the first.

As a result, while the economy did dip in late 2020, industrial production – upon which 15 million jobs directly or indirectly depend – remained steady. So too did the truck toll mileage index, which reflects the numbers of trucks on German highways and is considered a good measure of economic activity.

Reasons for optimism

There are reasons for cautious economic optimism in 2021 and beyond – for example, the progress Germany made between the first and the second shutdown. In the third quarter of 2020, before the second lockdown, growth increased by 8.5 percent, leaving the economy operating at 96 percent of its pre-pandemic level.

“In general, the German economy is still going well, even though several individual sectors are suffering a lot,” concluded Christian Rusche from the Cologne-based German Economic Institute (IW Köln) in the fall. “Automobile construction, for instance, is slowly picking up again.”

Further reasons for confidence in Germany’s resilience include its structural advantages and its ability to draw on solutions that worked during the last period of economic turmoil, namely the financial crisis of 2007–2008. Compared to other European countries, Germany is less reliant upon service sectors with lots of face-to-face human interaction. When the pandemic began, Germany had far lower infection rates than, for example, Italy or Spain, and its decentralized healthcare system gave local hospitals the flexibility they needed to quickly adapt.

Healthy structures

Meanwhile, tools that proved successful back in 2008 were redeployed. In addition to the furlough program, they included suspensions of mandatory bankruptcy declarations and the rollout of fast, unbureaucratic loans from public banks.

Last but not least, in reaction to the financial crisis, German national and regional governments and the business community had the foresight to create insurance funds for more difficult times. The experience of the global financial crisis encouraged many German companies, especially small to medium-sized enterprises (SMEs), to exercise financial prudence. According to the German Savings Banks Association (DSGV), the country’s mid-sized firms enjoy an equity ratio of 39 percent, which has kept bankruptcies to a minimum. In other words, many of Germany’s SMEs, often called the engine room of the economy, were in a position to compensate for temporary losses in income.

Individual creativity

Stories abound throughout Germany of SMEs getting through the pandemic by taking advantage of the tools the state has put at their disposal and also by thinking outside of the box.

Take SchuF, a 100-year-old precision engineering firm that specializes in making valves. SchuF had to tell some employees to stay home for the first time in over ten years. Twenty percent of its workforce was furloughed, but “only in the office,” as CEO Martin Frank stressed in the fall. Despite a moderate decline in orders, the workshop stayed open and production carried on. By keeping his workforce together, Frank expects that his company will be able to pick up where it left off when the economy recovers.

Other entrepreneurs are changing their approach and product range to match new social realities. The British-German backpack manufacturer RiutBags, for instance, found demand plummeting amidst all manner of travel restrictions. So founder Sarah Giblin adapted and created an easy-to-disinfect rucksack especially for the Covid-19 world.

“There are some businesses out there who are going to start rebuilding the world around us to respond to how we’re feeling at the moment,” she predicts. “The world has changed, I accept that it has changed – so is there something I should be doing as a designer to help humans adapt to the new world through the objects that I make?”

HOW DOES THE FEDERAL SYSTEM WORK?

The federal system in Germany consists of two main levels: the national parliament and the national government cabinet, headed by the chancellor (presently, Angela Merkel), and the regional parliaments and governments of the 16 German states, headed by the state premiers. Examples of the states include Bavaria and North Rhine-Westphalia.

The regional states have substantial powers of their own, being responsible for things like education and policing as well as large parts of the health system. During the coronavirus pandemic, they have made important decisions about rules and guidelines. This is why corona-related measures may differ slightly from state to state. The state premiers meet regularly for video conferences with the chancellor to coordinate policy across Germany and to take joint decisions.

Digital innovation and acceleration

Necessity is not only the mother of invention but also a great accelerator. As detailed in the previous issue of Markets Germany, the Covid-19 pandemic has bolstered everything digital in Germany, particularly as more and more people work from home and avoid face-to-face meetings. The German digital industries association Bitkom reports that 75 percent of Germany’s biggest companies expanded their investment in digitalization in 2020. The German government has also sped up its plans to develop digital infrastructure.

German industry is now well on the way toward creating more flexible, efficient and customized manufacturing processes, which in turn are yielding new business models and opportunities. Figures from the Ministry for Economic Affairs and Energy show the government plans to invest EUR 40 billion in the digital networking of industry. Some 20 percent of German automotive companies already have automatized plants, while 83 percent of companies predict a “high level of digitalization” in their supply chains. To maintain that advantage, the German government is also continuing to fund the EUR 50 million technology program PAiCE, which promotes the development of digital industry platforms as well as collaboration between firms using those platforms.

Long-term trends

Moreover, the pandemic has highlighted the fragility of global supply chains, and growing numbers of companies are expected to start manufacturing locally. In turn, that could mean more and more German firms trying to exploit the advantages of sectors like robotics.

According to figures released in June 2020 by the International Federation of Robotics (IFR), Germany has one of the highest numbers of industrial robots per worker in the world, with 388 robots for every 10,000 manual laborers. This ratio is much higher than the international average of 99 and only exceeded by Singapore and South Korea.

Green energy shows resilience

Some sectors are by their very nature more pandemic-resilient than others. Germany’s transition to renewable energy, for instance, is significantly less impacted by the coronavirus – and the government has invested heavily in it. That’s one reason why Enapter, the Italian-Thai manufacturer of hydrogen generators, or electrolyzers, has decided to go through with building a EUR 100 million construction facility in the western German town of Saerbeck despite the pandemic disruption.

For Enapter, the biggest problem in 2020 was how the coronavirus impeded the search for a location. “The coronavirus did slow us down a little bit, particularly at the beginning of the year, but we never had to close down production,” says Enapter’s head of strategy Thomas Chrometzka. “That was very important to us because our motto is: ‘We’re offering a solution to climate change, so we really can’t be slowed down – we need to speed up.’”

“We chose Germany because we think it is a very good location for the stage we’re at,” he adds. “Some people ask us: ‘Why don’t you just go to the Far East and mass-produce electrolyzers there?’ The answer is that we need to come up with the processes for how to mass-produce. Our product is in serial production, but to bring that to mass production we need to redesign it and then get the machines and processes in place to produce thousands and thousands of them.”

To achieve that aim, Chrometzka explains, Enapter needs “a structurally strong environment with highly qualified HR capacities, with good connections to the research and development community and to suppliers. All of this we found in Germany.”

The first year of the coronavirus pandemic has been full of ups and downs, with the situation remaining fluid and subject to rapid changes and reversals of fortune. Despite all the legitimate causes for concern, however, the outlook for Europe’s largest economy is on the whole optimistic – Germany is carrying on.