Has the state been too generous?
GERMANY’S FAMED Kurzarbeitergeld programme, which funnels government cash to workers whose hours are cut by employers, is the “gold standard” of furlough schemes, reckons the IMF. It has been widely imitated across Europe by governments seeking to protect jobs and incomes from the full ravages of covid-19 lockdowns. In Germany, under relaxed criteria introduced in March that were extended to nearly 7m workers, it has limited the rise in unemployment to around 600,000 and kept consumer spending buoyant.
The extraordinary rescue package assembled by Angela Merkel’s government, which also included bridging loans to firms and a suspension of fiscal rules to allow stimulus spending, was broadly endorsed by Germany’s economic establishment. It has fuelled a more robust recovery than elsewhere in Europe. But two recent decisions have seen that consensus start to fray. The first was an extension of Kurzarbeitergeld payments to 24 months. The second was a further moratorium on Germany’s strict obligation on overly indebted companies to declare bankruptcy.
Such blanket measures, fear some, could spawn vast numbers of “zombie” firms kept alive by a drip-feed of state aid, hindering the redeployment of capital and labour to more productive uses. “Kurzarbeitergeld could tie workers to companies that have no future,” said Jens Weidmann, head of the Bundesbank, on September 2nd. Christian Sewing, the CEO of Deutsche Bank, warned that one in every six German firms risked zombification. The OECD raised similar concerns this week.
In fact there are two dangers. One is that the state props up firms that would have struggled even without the pandemic. The decision to extend Kurzarbeitergeld was not necessarily wrong but taken too early, reckons Andreas Peichl, an economist at the Ifo institute in Munich. He would have preferred changing tax rules to allow companies to offset current losses against pre-pandemic profits. (Olaf Scholz, the finance minister, says fears of zombification are “bloodless textbook speculation.”)
The second risk is that covid-19 causes structural change in economies. A travel agency or music-promotion company that was thriving before the pandemic and now surviving on state support may struggle afterwards if consumer habits shift permanently. But it is too early to know.
A related issue is that state help may encourage some companies—especially in Germany’s crucial car industry, which has disproportionately relied on Kurzarbeitergeld—to postpone some hard choices about their business models. Germany is unusual among rich countries in having focused solely on short-term emergency measures, notes Ludovic Subran, chief economist at Allianz, an insurer, rather than long-term recovery measures like retraining, tax reform or investment. Germany’s well-capitalised firms may actually be at less risk of zombification than their counterparts elsewhere in Europe. But they have not yet been offered much of a guide to the future.
One reason for that may be next year’s election, at which Mrs Merkel will stand down after 16 years in office. Even before the virus struck, some economists had begun to chafe against Germany’s low-deficit, low-investment orthodoxy, especially the currently suspended “debt brake”, which constrains borrowing. Mr Scholz, who is running to succeed Mrs Merkel, says the debt brake should return in 2022, but others in his Social Democratic Party disagree. The Greens, likely to join the next government, will hope to exploit the state’s sudden conversion to activism to press their case for long-term public investment. Conversely, whoever leads Mrs Merkel’s conservatives into the election may push for a return to fiscal restraint and smaller government. Germany’s short-term measures may have long-term consequences.
By The Economist
