Despite Corona – everything remains as it is? The Federal Government is busily trying to keep this illusion alive with triple-digit billions. But this social autosuggestion is becoming more and more fragile, the consequences more and more threatening.
The letter V stands for Maybe, Probably. Mistakes are unavoidable, admits health minister Jens Spahn frankly, and that is an admission that is rarely honest for politicians in Germany. “That we will probably have to forgive each other a lot in a few months, […] because never before in the history of the Federal Republic – and perhaps even beyond – have we had to make such far-reaching decisions in such a short time and under such circumstances, with the knowledge that is available and with the imponderables that are there. In fact, knowledge about corona is limited – and also about the consequences of a pandemic and a global shutdown. If you know more, cast the first stone.
In uncertainty one clings to historical experience. For the German government, this is the financial crisis. In 2008, there was a lockdown of the banks that no longer granted credit, became insolvent by the dozen. But without money and credit, the finely ramified network of payment flows collapses. At that time, Germany, the USA and other countries reacted with billions of euros to make the bankrupt banks liquid again.
Germany responded to the threat of unemployment by expanding short-time work and implementing an economic stimulus package – some of the construction sites for the autobahn or the railroad are still open today. The economic crash followed the shape of the V – steep fall, but also rapid rise, which even overcompensated for the slump in growth and, even faster than optimists expected, repaid the national debt via higher tax revenues. With astonishing routine and speed, the federal government activated the plans of that time – and added an additional zero or even several behind the programs.
By April 22 this year, some 718,000 companies, or one in three companies in Germany, had registered for short-time work. Germany thus spends 60% of its total annual economic output on subsidies, as of the end of April. This is a record figure – in terms of economic output, it is five times as much as in the USA; three times as much as Italy or Great Britain spend, more than twice as much as France. The expectation is clear: even if the number of short-time workers is 20 or 30 times higher than during the financial crisis – the recovery will be all the faster once the lockdown is over, if the factories can simply be restarted because the employees are waiting for it. A country is put into an artificial sleep, and the prince’s kiss awakens Sleeping Beauty from her sleep again. That is the theory behind the lockdown.
But what if the prince is delayed, the life-support measures become more and more expensive and last longer and longer, and the kiss does not work immediately? Or economically speaking – when the V becomes the L, i.e. with a prolonged period of weakness after the crash, or even to a stairway down? Then there would be a Spahn mistake – well meant, but done the wrong thing – sorry, economy, pity, society – stupidly done.
Did it go badly?
And it could go pretty badly. The state is currently compensating for the lack of demand – short-time work is being increased even further, bridging money is being paid out, special programmes for hotels and restaurants are being set up, companies like Adidas are being kept alive with 2.5 billion, and Lufthansa is happy to do a little more. The state’s resources are unlimited, promises Finance Minister Olaf Scholz – a bold claim. Hobby economists, for example, from DIE ZEIT, explain that Finance Minister Olaf Scholz does not take away anyone’s funds for short-time work – because taxes are only borrowed, so to speak: If the recipients of short-time work benefits are busy shopping, the business gets going again and in the end everyone wins, including the taxpayers fleeced for it. It is as simple as that.
It is the old Keynesian dream that the state could simply compensate for temporary gaps in demand, supplemented by the “New Monetary Economy”: because the states have long been over-indebted, just as Italy was unable to finance its interest rates even before Corona, the European Central Bank has to pump money into the cycle. Corona is also passing away, the economy only exists if you give it enough money. It really works – if citizens do not become suspicious, do not lose faith in Baron Münchhausen pulling himself out of the swamp by his own hair.
But what if he doesn’t? What if the next consumption frenzy is not only postponed – but cancelled because people do not believe in eternal money from the state? It could be that the Germans are saving because they don’t trust the end of Corona and are preparing for a second wave, at least with savings. If the purchase of the car is simply put off for a long time; cars age hardly functionally, rather aesthetically. When operations are not postponed, but do not take place at all, and the artificial knee is dispensed with, the washing machine is repaired again instead of being replaced, and the move to the larger apartment is postponed for the time being? When the factory is not expanded or renewed, at best expensive labour is rationalised away?
And that is exactly what many companies are planning: Downsize, downsize, rationalize. Jobs are shaky, fear is growing. The IAB, the scientific service of the Federal Employment Agency, is talking about three million unemployed and a drop in the workforce of millions more. So far, all the research institutes have underestimated the force of the downturn – simply because it does not fit into their models, which can only be designed to update the figures but not to break them down. It is more realistic to expect five or even more millions of unemployed people to collect support and become taxpayers and contributors. Or six? Or seven?
How is it going globally after Corona?
The cool calculation and concern of millions of people, economic decision-makers and investors is driven by future expectations; it is speculation about the uncertain future. How long will Corona stay, not only in Germany, but also around it? When the future seems vague and uncertain, people wait instead of consuming, reduce instead of invest, reduce instead of build. Then the state can always stuff new billions into pockets, it stays in there. Technically speaking, this reduces the speed at which money circulates. There is more money, but it doesn’t circulate – the economy falters. And the future of demand seems uncertain: Why should entrepreneurs invest and perhaps be liable with the remainder of their private assets when the SPD is constantly talking about tax increases, asset levies and redistribution? The phrase “let’s wait and see” then becomes an economic killer, triggered by slogans thrown down by people like Saskia Esken, the SPD chairwoman. Maybe it may be possible to get things going again in Germany – but are German taxes enough to keep the concrete castles on the Costa Brava or in Mallorca and Greece going? If there is any doubt that economic stimulus packages can save the domestic economy – they certainly won’t be enough for the whole of Europe.
Germany’s export orientation is now the Achilles’ heel of the economy – it lives from investment in factories in China, from exports to southern Europe, which are paid for with the money that German holidaymakers leave on sunny beaches. The worldwide falling oil price is a warning signal: oil lubricates the economy, is a raw material that is in every product, in the potato in the form of fertilizer and tractor fuel, in every chemical product, in every form of mobility. Worldwide, the demand for oil is falling because the demand for products has collapsed. It is a crisis indicator of a deflationary process.
Deflation means that prices are falling. This makes life pleasant for the consumer, but hell for the producers: Who wants to invest and produce when the selling price is constantly falling – in the case of oil on the futures markets, even becoming negative? The economists of the European Central Bank fear deflation far more than inflation. That is why zero and negative interest rates have been introduced, an inflation target of two per cent has been set and this is being pursued with all permitted and unpermitted means of monetary policy, just not to get deflation going. If prices fall, the economy will freeze: it will be worth bunkering money instead of spending or even investing.
But that is exactly where the global economy stands: falling demand worldwide causes prices to fall. This mechanism works quickly: the prices for real estate in the German conurbations are already falling. Are there fewer people in Germany? No. It’s just that many dreams of bigger living spaces have been shattered. Or postponed. If the department stores are only allowed to open again, then there will be discount battles – the summer goods will be squandered until they are given away, because otherwise there will definitely not be another summer for the dealers. Many will open one last time, for the last sale. A wave of bankruptcies in the already ailing retail trade in the city centres is threatening – Amazon was the pre-existing illness, Corona the death sentence.
The caution of consumers and the pessimistic expectations of entrepreneurs combine to form a poisonous mixture that renders any economic stimulus program of the federal government ineffective. The phrase “not at first” absorbs every economic stimulus program and makes it ineffective.
The supply shock is yet to come
Allegedly the German showpiece industry, the car manufacturers, are trying to increase production again. Instead of short-time work benefits, the state is then supposed to artificially heat up the demand for cars; the use of state money therefore continues without end for the time being. But that will not be so easy. A German car company has about 100,000 suppliers worldwide. Some of them no longer exist. A chip, a plastic part, a piece of sheet metal, steel or fabric is missing, because the supplier is possibly located in Italy or Spain and cannot yet produce, the truck is stopped at a border, the delivery from China takes too long, or the manufacturer has long since gone bankrupt.
Even in the Chinese birthplace of the pandemic, Wuhan, the factories are being restarted – but there is no demand from Europe or the USA. Technically, they may be able to produce – but nobody orders them. How do Daimler and VW plan to sell cars in, say, Minnesota or Michigan, if the showrooms are nailed up and the dealers are broke? How will they build engines if the crankshaft does not arrive from Spain? Just in time production, offshoring, squeezing every last cent out of the supply chain and specializing in the smallest detail – the recipes for success of the past decades are just poison pills.
It’s downright macabre: Hans-Werner Sinn has called this “bazaar economy” – Germany buys cheap preliminary products worldwide, plugs them up and sells them at a premium as “Made in Germany”. The model is now ailing. And yes, the backsourcing of strategic goods such as mouthguards and medicines may be right, automotive suppliers can be replaced – but someone has to pay for that. Who pays is the consumers. Not all prices will fall as a result. Some will rise.
Deflation and inflation simultaneously
Vegetables are already becoming more expensive; peppers up to 40 percent; asparagus is becoming a luxury again. There is a lack of harvest workers from Morocco in Spain and from Romania in Germany. Those who are not there to harvest are also absent when planting. Goods whose purchase cannot be postponed without problems become more expensive. There are also opportunities. If Majorca as a holiday destination – it is also cooler, the Baltic seaside resorts should soon be crowded, if they are allowed. Ruhpolding will experience guests from the Ruhr area, who have stayed away since the late 60s. Even the shanty towns on the Rhine, Bingen and Rüdesheim and Unkel will be frequented again; perhaps even the Harz Mountains and perhaps Traben-Trarbach will experience a short, second spring like the Emperor’s Bath in Ems before 1914. Today, it attracts visitors to places they did not want to go for a long time. Inflationary and deflationary processes run side by side. But because the supply is gradually narrowing, prices start to rise earlier rather than later.
A ghost is haunting: Stagflation
And because the V thus becomes the L, sooner rather than later Germany’s rescue formula will also be in crisis: the SPD would like to raise taxes and will probably push it through – but there are hardly any high incomes and payers left who could be fleeced. Wealth tax? The secret tip of the left and the Greens is leeward.
Article written by German journalist and chairman of the Ludwig Erhard Foundation, Roland Tichy.
Original version, in German at: https://www.tichyseinblick.de/tichys-einblick/wirtschaft-nach-corona-die-grosse-v-illusion/