Impact of Coronavirus Crisis on German Economy

EPC | 13 Jul 2020

The coronavirus crisis has deeply affected the German economy. Both local and global lockdowns due to the pandemic have resulted in the destruction of the three main foundations of the German economy, namely domestic consumption, internal and external German investments, and exports. Despite the numerous financial packages and assistance programmes injected by the government of Chancellor Angela Merkel into faltering sectors to achieve stability, the German economy will not recover from the effects of the pandemic before the end of 2022, according to the German Federal Bank (the Deutsche Bundesbank).

The reality of the German economy in light of the pandemic

1- The German economy enters a phase of contraction

According to the expectations of the International Monetary Fund (IMF), the German economy will shrink by 6.9 percent in 2020. Prior to the lockdown because of the coronavirus pandemic, that is in the first quarter of 2020, the German economy recorded a growth of up to 2.2 percent. Germany had imposed restrictions because of the coronavirus pandemic on 22 March 2020, which means that it delayed in taking the lockdown decision compared to other European countries, which reduced the damage sustained by the German gross domestic product (GDP) during the first quarter of 2020. In addition, Germany has rushed to ease the restrictions at an early stage, permitting the opening of commercial stores, the resumption of industrial production, and the return of matches of the German League (the Bundesliga).

The Bundesbank estimates that the GDP will shrink by 7.1 percent in 2020 but that the German economy will resume recording positive figures in early 2021.

2- Worst decline recorded in industrial production

The Federal Statistical Office of Germany has revealed that industrial production declined by 25.3 percent since the lockdown due to the coronavirus pandemic, which is the worst performance since the adoption of the principle of analysis by time periods in 1991. Industrial production in Germany declined by 17.9 percent in April 2020 compared to the previous month, while March 2020 witnessed a decline by 8.9 percent compared to the same time in 2019.

Such a decline in industrial production constitutes a real blow to the German policy both internally and externally. German industries are considered an effective tool of German foreign policy. Besides, industrial lobbies play a strong role in mapping internal politics and voter inclinations.

3- Largest decline in exports in German history

The strength of the German economy lies in the strength of its exports. However, the new reality generated by the coronavirus pandemic and the lockdown adopted by most countries in the world has transformed this strength into a source of significant weakness. German exports have declined to their lowest levels ever since the lockdown because of the coronavirus. According to the German Federal Statistical Office, the value of exports declined by 31.1 percent in April 2020 compared to the same month in the previous year, that is by 75.7 billion euros. This decline is the largest in a particular month compared to the same month a year earlier since the inception of foreign trade statistics in 1950. Compared to March 2020, exports declined by 24.0 percent.

4- Concern about the rise in unemployment rates

The reduction of unemployment rates to their lowest level since the unification of Germany is considered one of the most important domestic achievements by German Chancellor Angela Merkel at the economic level over the last 15 years. While Germany is in urgent need of hundreds of thousands of specialized workers, with the start of the emergence of the effects of the coronavirus on the German economy, initial data have emerged indicating an unprecedented increase in the number of unemployed. The Statistical Office has mentioned, at the beginning of June 2020, that the unemployment rate in the German economy recorded 6.1 percent at the end of May 2020 compared to 5.8 percent in the previous month. According to data, the number of unemployed increased by 238 thousand people in May 2020 to 2.813 million people, while companies submitted more than 11 million applications to benefit from the partial unemployment subsidies for their staff as of March 2020.

Main affected economic sectors

According to the statistics of the Halle Institute for Economic Research (IWH), in May 2020, a significant increase was recorded in the number of companies applying for the declaration of bankruptcy. The Institute underlined that the number of applications reached 1,019 in Germany, indicating that five of those companies employ more than 10,000 people. According to the estimates of economic institutes in Germany, the number of companies to declare their bankruptcy till 2021 will reach nearly 29,000. Companies active in the fields of industries and services continue to be the most affected as a result of the economic consequences of the coronavirus crisis.

The main affected sectors are the following:

  • German automotive industry is the biggest loser in Germany. The decline in this sector’s exports in April 2020 has reached 73.6 percent compared to the same month in the previous year. This amounts to a decline in the exports of cars and vehicles from 19 billion euros to less than five billion euros.
  • Mechanical engineering industries: this sector has been greatly affected by the coronavirus pandemic. Relevant exports declined by 29.6 percent in April 2020 compared with the same month in the previous year.
  • The travel and tourism sector: this sector is experiencing a significant crisis as a result of the lockdown and travel warnings launched by the German authorities. According to the Association of the German Tourism Industry, sales are expected to decline to nearly 10.8 billion euros by the end of June 2020.

Nevertheless, some German industries have witnessed an increase in production and exports during the period of coronavirus. Exports of pharmaceutical products, i.e. medicines, have increased by nearly 10 percent during the first quarter of 2020 compared to the previous year.

Economic recovery programmes

The German government has approved a historic recovery plan that provides for a series of actions worth 130 billion euros to stimulate its economy, including the following:

  • Temporary cuts in value-added tax (VAT) from 19 percent to 16 percent until 31 December 2020.
  • Assumption by the federal government of debts of local governments.
  • Encouraging the use of eco-friendly technology and techniques.
  • Allocating aid of up to 6,000 euros to every person who buys a new electrical car.
  • Allocating 2.5 billion euros to the construction of electric car charging stations.
  • Reducing the electricity cost for individuals.
  • Providing subsidies to families worth 300 euros per child.

During the first week of the lockdown, the German government had urgently injected nearly 45 billion euros into the market in the form of grants to assist the self-employed in overcoming the consequences of the coronavirus for their commercial or industrial activity. Individual benefit ranged between 9,000 and 15,000 euros, which helped in implementing the lockdown and creating a degree of market stability.

The German government has also started to study rescue programmes for major companies, as in the case of the airline Lufthansa which will receive a total assistance worth nine billion euros.

Fears of the penetration of foreign capital into strategic economic sectors

In light of the decline of economic performance and the distress experienced by many German companies, the German federal government fears that many companies will have to sell their assets to foreign investors, especially Chinese investors who are more interested in taking over some sensitive industries in Germany and other European countries. That is why German legislators have been quick to develop new, more stringent laws and controls with the aim of reducing the possibility of control by foreign companies from outside the European Union (EU) over faltering companies and establishments, particularly those active in areas of strategic investment. On 18 June 2020, the German Parliament (the Bundestag) voted on a law that would enable the scrutiny of foreign investments to identify their origins. The German government aims from this law to identify the backers of potential investors to prevent any acquisitions with a political background.

German Economy Minister Peter Altmaier explained before Parliament the necessity of maintaining sensitive companies and technologies in particular sectors, mainly the health sector. He indicated that the external acquisition of important companies should be made more strategically difficult. The German Minister added: “not everybody with the desire to invest has the same true intentions”.

Chinese capital and the attempt to penetrate advanced and sensitive industries

The Chinese attempts to buy German companies or shares therein are not new. On several occasions, German governments have warned against Chinese aspirations to invest in German companies with advanced technology or companies active in strategic sectors such as health, energy generation and transfer, water, and communications.

In 2016, Chinese investors took over the Ausburg-based Kuka robotics factory which supplies automotive companies with the produced robots. The German authorities, including the Ministry of Economy, could not prevent the acquisition since it did not contradict the concept of strategic investment interests, embodied in the communications, electricity and water sectors. However, the then Minister of the Economy Sigmar Gabriel called for imposing stringent constraints to prevent the acquisition by foreign companies of German technology.

In 2018, the government of Chancellor Angela Merkel strongly opposed the attempt by a state-owned Chinese company to purchase 20 percent of the shares of the Berlin-based company 50Hertz for fear that Beijing would acquire an important economic card that affects one of the vital economic fields and that can be used as a means of political pressure.

In general, attempts by Chinese investors to penetrate the most important German industries are not new. Beijing controls 5 percent of the shares of the automotive company Daimler, 8.5 percent of the shares of the precision mechanical engineering company Heidelberger Druckmaschinen, in addition to many small and medium companies, such as Ballard Power Systems, Biotest, Grammer, Manz, Tom Tailor, KION, etc.

It is worth mentioning that Chinese investments in Germany have reached 10 billion euros in 2018, although they declined by 85 percent in 2019. This is attributable to several reasons, mainly the slowdown of the Chinese economy, in addition to the tightening of German procedures with regard to the finalization of deals.

New European procedures with regard to foreign investments

Since 2017, Germany has been working in coordination with France and Italy at the European level to change the European legal framework related to the review of direct investments pertaining to non-EU investors. This coordination aims at improving cooperation between EU member states in the area of scrutinizing foreign investments and providing national legislators with a better opportunity to study ways of achieving those goals.

On 19 March 2019, the European Parliament adopted European rules to scrutinize foreign direct investments (FDI). A cooperation mechanism was established to enable EU countries and the European Commission (EC) to exchange information and discuss fears pertaining to specific investments. Consequently, a new mechanism at the EU level was developed for the first time to coordinate the scrutiny of foreign investments that are likely to affect security and public order in the EU and its member states. Thew new rules would also allow the EU executive Commission to issue opinion when the investment constitutes a threat to security or public order in more than one European country, or when it undermines a project or programme of importance to the EU as a whole.

In March 2020, the EC also issued guidelines to ensure the adoption of a strong approach at the EU level in scrutinizing foreign investment at the time of public health crises or during the associated economic weakness. The aims of the guidelines are as follows:

  • Preserving EU companies and vital assets, particularly in areas such as health, medical research, biotechnology, and infrastructure necessary for public security.
  • Striking a balance between constricting foreign investments within the EU and avoiding undermining the EU openness to foreign investments.
  • Demanding that member states establish an integrated scrutiny mechanism in line with EU law and international obligations to deal with acquisitions by foreign investors that could constitute a threat to EU security or public order.
  • The new guidelines enable EU member states to constrict the free movement of capital.

Under those rules and guidelines, in June 2020, the German Parliament approved a law that enables the scrutiny of foreign investments and the identification of their origins. The Bundestag also initiated the amendment of the foreign trade law and associated laws, in line with EU regulations and new rules developed in light of the consequences of the coronavirus pandemic.

The impact of the coronavirus crisis on the political scene in Germany

The coronavirus crisis has put many political officials in Germany under a real test that could clearly determine the future of the Chancellorship post that has been occupied by Angela Merkel for 15 years. That test will also set out the map of the political powers (parties) that could take control of local parliaments in preparation for the parliamentary elections scheduled for the autumn of 2021.

The results of an opinion poll carried out in Germany in late May 2020 have revealed an increase in the popularity of the Christian Union, to which belongs Chancellor Angela Merkel, and of the Liberal Party. This increases the likelihood of the emergence of new political alliances during the next elections. The Christian Union, comprising the Christian Democratic Party and the Christian Social Union in Bavaria garnered 40 percent of the votes surveyed, i.e. recording an increase of 2 percentage points, while the popularity of the Liberals increased to 8 percent. The results also showed the stable popularity of the Social Democratic Party of Germany at 16 percent, and the Greens at 15 percent, while the popularity of the populist, right-wing Alternative for Germany and of the Left Party decreased by one point each, to 9 percent and 8 percent respectively. Those results are attributable to the way the governing Union in Germany and the local governments have dealt with the coronavirus pandemic where the German model in fighting the epidemic was described as successful.

At the level of the Merkel-led Christian Democratic Party, some names have emerged who could be candidate for the post of Chancellor after Merkel who does not intend to run for another term. One of the leading names in this respect is Friedrich Merz, an economist and lawyer who had previously led the former parliamentary group of the Christian Union. He is one of the opponents of Merkel’s policies within his party, and currently appears to be engaged in a battle to win the party leadership and subsequently run for the position of Chancellor. The second name within Merkel’s party is Armin Laschet, Minister-President of North Rhine-Westphalia who has caused controversy because of the way he managed the epidemic crisis.

The most prominent figure that emerged at the top of the Christian Social Union in Bavaria, the small ally of Merkel’s party, is Markus Söder, Minister-President of the state of Bavaria who became widely renowned for the way his state managed the coronavirus crisis, so much so that some German newspapers called him the Corona Kaiser. Some political circles nominate him for the post of Chancellor despite his temporary denial of having aspirations for the post.

Conclusions

  • Despite Germany’s successful model in managing the coronavirus crisis, the crisis has left a deep impact on the German economy which is expected to contract by nearly 6.9 percent in 2020. Industrial production also declined by nearly 25.3 percent. German exports declined by 31.1 percent while the unemployment rate rose to 6.1 percent. Nevertheless, the German economy is expected to return to recording positive figures starting from 2021.
  • The German sectors most affected are the automotive industry, the mechanical engineering industries, and the travel and tourism sector. The pharmaceutical products and medicines sector has achieved outstanding profit rates.
  • The German government fears that many companies may have to sell their assets to foreign investors, particularly Chinese investors more interested in taking control of some sensitive industries in Germany. Consequently, in June 2020, the German Parliament adopted a law that enables scrutinizing foreign investments and identifying their origins to prevent any acquisitions with a political background.
  • The coronavirus crisis has placed many political officials in Germany under a real test that may clearly determine the future of the Chancellorship post currently assumed by Angela Merkel. The test will also set out a map of the political powers that can control the local parliaments in German states in preparation for the parliamentary elections scheduled for autumn 2021.
  • The results of an opinion poll in Germany have revealed the growing popularity of the Christian Union to which Chancellor Angela Merkel belongs, together with the Liberal Party. This increases the likelihood of the emergence of new political alliances during the next elections.

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