26 March 2020

The economy and the labor market in Germany, seriously affected by the coronavirus epidemic

Negoiţă Sorin

The coronavirus epidemic, which in Germany had its outbreak in the last couple of weeks, turning it into the third state in Europe and the fifth worldwide in terms of SARS CoV-2 infections (almost 34.000 cases), is increasingly affecting the German business environment, particularly the employees. Some pessimistic scenarios are placing world’s strongest economy in a difficult situation, which would lead to loses worth of billions of euro. Also, the labor market in Germany will be affected by the decrease or temporary cancellation of jobs, which requires some obligations from the German companies in reducing their employees work program or, in an unfortunate case, to increase the number of jobless people. For all of these, the German federal government already came up with counterbalance measures, to keep the economy as much as possible as it is right now, but also to protect those employees who will surely face their incomes’ decrease or who could lose their jobs.

Image source: Mediafax

Germany’s economy seems to be shaken

The crisis generated by the recent exponential development of coronavirus epidemic in Germany is seriously affecting the strongest economy in the Euro zone. According to a study made by economics experts at the Munich Ifo-Institute, published on March 22th, the “Coronavirus will make Germany’s economy to lose hundreds of billions of Euro in production, will stimulate the short-period labor and unemployment and will pressure the state budget a lot”. Furthermore, this institute’s president, Clemens Fuest, stated that “It is estimated that these costs will better everything Germany witnessed since the economic crises or the natural disasters from the last decades”.

German economists’ study presents a detailed “estimation of costs (loses) if the economic activity will be partially interrupted for one, two or three months, due to the coronavirus epidemic, which can meet two scenarios: a medium scenario, which is an immediate activation of production and a maximal one, wherein the recovery will be belated. Therefore, if in the happiest scenario, which is the one-month interruption of production and then the immediate start of the economic activity, there would still be recorded 152 billion euro loses at all levels, in the most unfortunate scenario, meaning the interruption of economic activity for three months and a belated recovery, there would be loses worth of 729 billion euro. All of these possible scenarios, related to the current economic production which is around 3400 billion euro, the German economic performance increase rate will be in a negative zone, somewhere between -4, 3 and – 20,6 percentage points. After having a look at these numbers, according to institute’s specialists’ estimations, this crisis could cost each German citizen around 9.000 euro.   

Starting from these estimations, the main goal of the Berlin leadership should be shorting economy’s partial closure, without affecting the fight against Covid-19 epidemic. They need strategies to combine the production activity restart and the continuation of the fight against coronavirus. In fact, the final message of the Fuest analysis and his colleagues is extremely clear: “A special importance for the political decisions is the question referring to which costs generate an extension of the shutdown (the production)”.

It is, however, true that Germany’s policymakers do not have the SARS CoV-19 virus fight under control. If the German citizens, for example, would not follow the “social distance” instructions imposed by the federal government and the local administration for limiting the individual contacts and would provoke virus’s spread, many companies, institutions and public places would have to be close for a long period, which could generate additional costs for the federal budget and, implicitly, the people’s living decrease. So, the 550 billion euro financial aid, promised by the federal government for the German companies, should be enough for the adjustment of their economic situation and would need additional funds allocation, which could only be provided through loans.

At the same time, there are other elements that neither German politics nor the population can influence. Everyone knows that Germany is an export-based nation (exports represent about 50% of added value), so Berlin is strongly influenced by decisions made in different European capitals, such as London, Paris, Rome or even Washington, Beijing and Tokyo, all strongly affected by this coronavirus epidemic period, whose magnitude and duration cannot be estimated even by the best specialists.

The German labor market could suffer a serious fall as well

Lately, the German labor market researchers have tried to present the impact the partial interruption of the economic activity will have on the labor force. The unanimous conclusion was that the prospects for German employees are quite bleak.

Thus, according to the above presented study, Ifo-Institute estimates a loss of up to 1, 8 million jobs subjected to social insurance contributions (the equivalent of 1, 35 million full-time jobs). Also, over 6 million employees could be affected by the reduction o f working time. In the most unfortunate case, Ifo economists expect a recurrence of the 2009 economic downturn, when Germany's GDP decreased, during the economic crisis, by almost 6 percent.

The Institute for the World Economy - IfW economists (Institut für Weltwirtschaft), in Kiel, seem to be the most pessimistic about it, presenting two scenarios, according to which they would expect a collapse between 4.5% and almost 9% of German GDP, if the economy’s recovery would not start until August. Thus, in an optimistic scenario, they believe that a German economy "deadlock" will take place by the end of April, the depreciation measures will gradually decrease, starting in May, and the production losses related to coronavirus will disappear in six months. The pessimistic scenario states that recovery will only start in August, and production in various sectors will not be the same as the coronavirus epidemic until early next year. Also related to this issue, IfW President, Gabriel Felbermayr, said (March 24th) that "the Corona crisis is quite a shock, many people cannot work or do business now, because the state has imposed quarantine.  A month of waiting means the twelfth part of the production deficit for the German economy. ... First of all, the Corona crisis is certainly a big shock that will change people's behavior, it will change it forever".   

Following the same logic, the Institute for Labor and Occupational Market Research - IAB (Institut für Arbeitsmarkt- und Berufsforschung), in Nuremberg, has a pessimistic image of the German labor market, which it is already under pressure. Thus, the crisis generated by the spread of SARS CoV-2 virus will cause an unemployment increase this year, which will amount to approximately 2.36 million unemployed people, with 90,000 more than in 2019. Also, the number of employed people will meet a deadlock somewhere at just over 45 million, with a temporary decline of about 300,000 people. These figures are based on a scenario that assumes that part of the economic activity will be reduced for six weeks and then get to normal for an equally long period. Based on these speculations, the IAB anticipates a real GDP decrease of two percent, with a temporary decrease of even to 6%.

In a different scenario, IAB researchers are considering a cessation of economic activity of two and a half months with a delayed normalization until the end of the year. In this case, the number of unemployed people could temporarily exceed 3 million, and a GDP decrease of about 4.7 percent. All in all, the researchers believe that these issues will not generate a global systemic crisis or long-term unemployment.

The coronavirus spread brings major challenges for the German economy and labor market. Therefore, in order to support employees and companies, the Bundestag decided, among other things, to facilitate access to the benefits of reduced working time. Thus, employers will get back the full social insurance contributions they have to pay for employees who work with reduced working time, and affected employees receive 60% of their last salary or 67% for those who have children.

The German government expects a record number of 2.35 million employees with reduced working hours this year, for whom it will provide the benefits presented. In addition, besides the 550 billion Euros dedicated to German companies, Berlin has, among other things, a fund for special situations for micro-enterprises and independent employees. At the same time, the German business environment is waiting for other regulations, in the next period, which will support the German economy, but also the labor market.

The federal government is considering supporting also the German renters

In Germany, a large part of the population has a rent contract for a home or a commercial space. Due to the effects of the coronavirus crisis, it is expected that hundreds of thousands of renters or even millions will accept substantial income losses in the coming period. In addition to employees, people with independent businesses or liberal trades, but also casual workers (for example, workers in the catering industry), will lose their economic base. At the same time, the housing costs in large cities represent between 30-40% of the monthly income of a household and many of those mentioned might face the threat of annulment of rental contracts and, consequently, they may lose their homes after only two months of not paying the rent.  

Usually, renters who do not pay two months in a row can be affected by lease’s annulment without prior notice. "We want to change that and work to make sure no one will lose their home", said a spokesman for the Federal Ministry of Justice. Also, the legal expert of the SPD parliamentary group, Johannes Fechner, said that "the owners do not suffer losses, because the rents must be paid later".

To that end, the Berlin Cabinet has drafted a law, which protects renters from possible rental contracts’ annulment until the end of June 2020, even if they would not fully pay their rents. However, the project does not provide any regulation for the contributions’ non-payment risk by the owners.

The "rescue package" also includes a legislative amendment with important consequences for both parties: renters and owners. This change benefits renters, who can partially or even completely reduce the payment to the owners, without allowing the owner to end the contract, both for housing and commercial premises. However, renters will have to prove that they have difficulty in paying rent due to the Covid-19 crisis (lowering incomes or small business non-performance). It is right that this project ,approved by the Government, which also stipulates the obligation of renters to pay the retests accumulated during the three months of exemption within 2 years (until June 3, 2022), has not yet been voted in the Bundestag.

Moreover, the Liberal Party (FDP) is proposing a special housing allowance for people who have proven to have massive income losses and need this support, as stated by Daniel Föst, the spokesman for the housing policy of the FDP parliamentary group. The amount of the special housing allowance should be established in relation to the income loss, as well as the rent’s value.

The bottom line is that the proposed law encourages owners to accept rent payments deferment, but does not have to agree with losing benefits. Thus, the Federal Association of Free Real Estate and Homeowners president (BFW), Andreas Ibel, reacts positively and states that "The Cabinet's decision regarding the moratorium on annulment shows a sense of proportion and responsibility for renters and owners. Therefore, we will be able to guarantee jointly that none of the affected will lose their home, but neither will the owners come to have existential problems”. However, it is imperative for such a measure to be correlated with the existence of financial support from federal authorities. Otherwise, there is a risk that homeowners and retailers will lose income shortly and even have to give up the whole business.

There are, however, some concerns among German economists (Institute for Economic Research, Cologne - IW), who believe that some renters would "take advantage" of late payment and rely on the "image of the wealthy owner, who can easily cope with the rents deferment".  However, statistics are different, as it shows that 22% of a total of 3.9 million homeowners have incomes below the population average, and about 57% of them only rent a home.   



 The courageous measures taken in the last days by the German Federal Government to support the economic sector to cope with the chaos created by the coronavirus pandemic, which is not only limited to the allocation of 550 billion euro for the affected companies, but also guarantees for additional loans, if needed, as well as other measures to protect the population, is an example of how leaders are addressing the situation. It is true that we are talking here about the most powerful economy of the Euro-zone and one of the most developed in the world, which can afford having a budget surplus, but also a nation that has repeatedly proven that it is capable of overcoming any impediment, following the "reborn from the ashes" logic. Perhaps the way Germany understood the danger created by the coronavirus epidemic has actually turned one of the countries to be most affected by the infection, to have the lowest mortality rate, only 0.5% (March 25), compared to 10% while in Italy or 7% in Spain. This is something that has made many analysts around the world wondering and has raised many question.

English version by Andreea Soare