Save The Economy
Save the economy - but right!.

Traders close their shops, trade fairs are canceled, hotels have to close, the self-employed lose orders – the epidemic hits the entrepreneurs & economy at large with full force. How do you survive the crisis?

  • The shock of the corona crisis is likely to be more severe than in the 2008 recession.
  • The economy also has to resort to extraordinary means.
  • Above all, however, it should convey hope to its citizens afterward.

The latest isolation measures have reached all over Germany at the latest: The economic shock caused by the coronavirus is becoming very severe. This applies not only to our country but also to the neighboring countries. Public life has come to a standstill in many places. From trade fair construction to tourism to gastronomy, companies break down their sales, and many of them are on the verge of ruin.

With the border closings in Europe and the production interruptions in Italy and Spain, supply chains are also disrupted, so that the first plants or at least production lines in the automotive industry must now be closed. While the interruption of the supply chain with China was initially still a problem, to which the company was able to react by reducing its inventory and adding air freight capacities, a failure of the usual just-in-time deliveries from other EU countries cannot be compensated for in the short term.

Prevent critical organ failure.

Since, unlike in the financial and economic crisis of 2008/2009, the economy is being affected in its breadth, the slump in economic output in the spring quarter is likely to be even more severe in many EU countries than it was then. The forecasts published so far, which mostly assume only a slight decline in the gross domestic product, have long been a waste in view of the overlapping news situation and the restrictions on public life that have been tightened due to staccato.

For economic policy, it is now a matter of limiting the damage and laying the foundation for ensuring that as much of the lost production as possible can be made up for quickly after the end of the crisis. It is therefore essential to protect the structures of the German economy. As my colleague Peter Bofinger put it, the German economy has been put in an artificial coma. The task of the politicians is now to prevent critical organ failure during this coma.

Announced measures are not enough

The first step is to keep companies alive which have lost their livelihoods due to the loss of sales and which are therefore facing bankruptcy. The decision of the federal government to facilitate access to short-time work and to reimburse companies for social security contributions for short-time workers is correct. This means that they are not forced to lay off workers, but can simply reduce working hours. The liquidity aids proposed by Federal Finance Minister Olaf Scholz and Federal Minister of Economics Peter Altmaier on the KfW development bank and tax deferrals are also the first correct measures.

However, these measures will not be enough. It is clear that for some companies, sales have plummeted so much that pure liquidity support is not enough. The state will have to intervene very soon. State participation and an increase in the equity of the companies concerned, at least in the case of larger corporations, by the federal and state governments would make sense. If the losses increase, the state is partly involved. If the economy recovers after the crisis, it can then also recover part of the funds used.

Refill for self-employed

An important construction site is the small (solo) self-employed, for whom KfW loans are hardly an option, perhaps because they only need a few thousand euros to bridge them, because the commercial banks are not interested in applying for these small loans for the companies. or because it is not a question of financing equipment, but of financing the livelihood of the self-employed. Here the federal government has to go back and find solutions. Direct payments or very long, interest-free loans are conceivable, ideally paid directly to those affected.

A second, important point is to prevent a drop in the purchasing power of citizens. If a large number of short-time employees soon work or even become unemployed, you will lack an important part of their income. The danger is that – beyond the original corona shock – a dangerous downward spiral results from even less consumption and even more job and income losses. Here it has to be considered how short-time workers and unemployment benefits can be increased quickly so that mass purchasing power is maintained.

And a third point is to create the well-founded hope for a quick recovery after the crisis: Here, the state would have to clearly communicate that after the isolation measures have been lifted, it will do everything possible to catch up on the demand that has not been implemented. More public investment, but also unconventional measures such as consumer checks or temporarily higher child benefits should be announced as soon as possible when the acute health crisis has been overcome. To stay in the image of the patient in an artificial coma: Without such rehabilitation measures, there is a risk that the German economy will suffer permanent damage.

About the Author

Prof. Dr. Sebastian Dullien

Wiss. Director, Institute for Macroeconomics and Business Cycle Research

Sebastian Dullien (born 1975) received his Ph.D. in economics and worked as an editor at the Financial Times Deutschland from 2000 to 2007. Since October 2007 he has been Professor of General Economics, since 2019 Scientific Director of the Institute for Macroeconomics and Business Cycle Research (IMK) in the Hans Böckler Foundation. He is one of seven economists who proposed a bundle of immediate measures to the federal government last week, the first of which are already being implemented.


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