Germany: Merkel’s €130bn COVID-19 bailout wins back electorate


Picture of Cordelia Friesendorf
Cordelia Friesendorf

Professor of Economics and Finance at the International School of Management, Hamburg

The world looks with awe at Germany’s tackling of the corona crisis. Albeit late in their response, the Merkel-led coalition government of Christian and Social Democrats were nimble crisis managers shutting down socioeconomic life, stocking up medical facilities and prioritising a hands-on approach to saving lives. While the infection rate rose to 200,000 cases, Germany was efficient in limiting fatality below 10,000. Unfortunately, the threat of a second wave still hangs in the air like a sword of Damocles and heavy economic losses have overshadowed much of the successes.

Amidst these concerns – which have been exacerbated by conspiracy theories that mitigation efforts are an attempt to curb citizens’ rights – Finance Minister Olaf Scholz has responded with a fabulous bailout proposal. This new economic stimulus package addresses 57 areas with a budget ceiling pegged at €130bn. These have been bundled into three broader areas: economic crisis management, the development of promising sectors, and finally, a commitment to honour EU obligations.

Aimed at supporting poorer consumers, the package includes a temporary reduction of the value-added tax from 19% to 16% starting July 2020. With this measure, the German government foregoes €20bn of tax income but hopes to accelerate consumption in rural and urban areas.

Climate action has also been at the heart of this stimulus package

On the spending side, €8bn has been allotted to support families with children, including a one-time pay-out of €300 per child. The €15bn in tax losses incurred by local governments are to be financed by the central and state governments. Overall, they stand to benefit from an allocation of €25bn for infrastructure, as well as for the socioeconomic and energy sectors. For the first time, the local health sector has received funding attention, with at least €2bn to be invested in expanding hospital capacities, installing digital infrastructure, telemedicine and robotic investments.

Climate action has also been at the heart of this stimulus package. €20bn will be allocated to strengthen e-mobility capacities for battery production, setting up of charging stations and incentives to shift small and medium enterprises from diesel to e-vehicles. Train, shipping and airway networks will be modernised and clean-energies will receive more than €15bn in new funding. Onshore and offshore hydropower technology will also receive a boost, with ambitious goals of up to 5 GW capacity to be set up by 2030. For this purpose, Germany aims to cooperate with African countries that are rich in water resources to ensure efficient and sustainable power production.

From artificial intelligence to smart city solutions, from pensions to student pay-outs, no socioeconomic area was left behind in this package. Much of these measures have been universally embraced. Government actions have definitely restored public confidence, thus rocketing Merkel’s performance ratings and suggesting an extension of her chancellorship.

The German government’s post-pandemic economic stimulus programme seems to offer a glimmer of hope

But even before the pandemic, Germany was looking at a gradual economic recession. Industrial sectors such as shipping and logistics remain largely subsidised. Exports in April 2020 suffered losses of €75bn representing a fall of 30% compared to the previous year, making it the largest loss since 1950. Experts forecast a growth of just around 3% in 2021 on the condition that COVID-19 solutions are found to ensure normal growth circumstances. Compared to other developed and developing economies, Germany has been slow in adopting new technologies putting it at a disadvantage.

The fall in production and employment losses have reminded the populace that globalisation is what puts food on their table. Amidst growing anxiety, the German government’s post-pandemic economic stimulus programme seems to offer a glimmer of hope. It has created a mood of reconciliation and holds promise for restoring solidarity.

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