Scholz unpacks his € 1.2 trillion bazooka and consigns the black zero to history

The spread of the corona virus is bringing the German economy to a standstill and forcing the government to abandon the long-held ‘black zero’ – the balanced budget policy. Over € 150 billion of borrowing is planned to help the country get through the crisis.

The situation looks bleak. Forecasters indicate that a recession can be expected in 2020, with a 1.5% decline in GDP expected. The Ifo Institute has provided calculations on the effect of the current economic standstill, which is expected to be more damaging than the financial and economic crisis of 2008/9. In the worst case, there could be a 20% drop in economic output (the range is estimated between 7.2% and 20%) and more than a million jobs could be lost. The standstill could cost between €255 billion and €729 billion:  For a two month partial shutdown, Ifo calculates costs between € 255 and € 495 billion, and for three months, between € 354  and 729 billion. 

As the crisis began, Finance Minister Olaf Scholz “unpacked the Bazooka” and promised unlimited liquidity aid, so that no company or business should go bankrupt simply because the corona virus has limited production or customers are missing.   He said, “There is no upper limit on the loan amount that KfW can grant….We are putting put all weapons on the table.”

Since then, he has gone further, expanding the government aid with extensive aid for businesses, small businesses and the self-employed. In total the package amounts to more than € 1.2 trillion.

Since he became Finance Minister in 2018, Scholz has often been criticised  – mainly by members of his own party, the SPD – for holding to the black zero policy.  Now, he argued, this has been shown to have been prudent. In an interview with the Zeit he said, ”There has been occasional criticism in the past that I have continued to insist on balanced budgets and reduced the debt ratio. I have always said that this is not an end in itself, but should give us the necessary strength when a crisis comes. Today, thanks to our solid public finances, we can do our utmost to fight the crisis.”

The most important tool companies have is one which absorbed  the effects of the financial and economic crisis in 2009/2010: the introduction of short-time work, where employees’ hours can be temporarily reduced in the case of economic downturn or lack of orders.   Companies can apply for short-time work at the Federal Employment Agency if 10% of the employees are affected by lost work (normally it is 33%). Short-time workers receive 60% of their previous net wages (67% if they have children), which is the level of unemployment benefits. All social security contributions are borne entirely by the Federal Agency (normally they have to be paid by employers during short-time work). 

The government have also provided for  deferrals of tax claims by the tax offices. Tax pre-payments are being adjusted to the situation.

Minister of Labour Hubertus Heil has ensured that parents with children up to age 12 who can no longer go to school or kindergarten are to be supported by continued wages paid by the employer. Companies can get this expenditure back from the state.

The KfW (the state credit institution for recovery) is providing government guarantees and loans which extend existing programmes and are currently planned to amount to €460 billion. If necessary, this can be increased in the short term by €93 billion.

Furthermore, a new stabilization fund for companies with a volume of another €600 billion was decided at the end of last week. This program will provide € 400 billion in guarantees for corporate liquidity shortages. 100 billion euros are planned as direct support for companies and a further €100 billion are additional KfW loans for companies.

The Zeit newspaper has analysed measures which will help small and medium-sized businesses to cover ongoing operating costs.  A total of €50 billion of grants (not loans) will be made available to support the self-employed and small businesses: each can receive emergency aid of up to €15,000. Further, liquidity support of €3 million, including low-interest loans and loans designed to bridge short-term financial bottlenecks, is also being put in place.

Aid programs have also been designed at a state level. Bavaria was the first federal state to launch an immediate program for small businesses with up to 250 employees and freelancers. Freelancers and the self-employed can receive non-repayable aid of between € 5,000 to € 30,000 immediately.

In North-Rhine Wetphalia, €25 billion is to be made available as economic aid, which corresponds to a third of the state budget. Guarantees are to be given to companies and grants to small companies. Tax deferrals and adjustments to tax prepayments are also being granted.

The Berlin state government has launched two emergency aid programmes totalling €600 million. The Emergency Aid I program is aimed at small and medium-sized companies with up to 250 employees. Emergency Aid II is aimed at small and very small businesses with a maximum of five employees, particularly hard hit by the corona crisis, as well as freelancers and solo self-employed people (for example, in trades and services, youth and education, creative industries, culture, social affairs, sports and tourism). They should be able to apply for grants to secure their professional or operational existence quickly and with little red tape. Emergency Aid II has a volume of € 100 million for the current year. The grant is €5,000 and can be applied for several times if necessary. This program is handled by the InvestitionsbankBerlin (IBB). 

Hamburg has also launched an aid program for small businesses and the self-employed. One-person companies can receive grants of €2,500 and companies with 51-250 employees can get € 25,000. There is also a ten-point program that includes deferral of commercial rents in Senate-owned houses.

The anti-corona economic stimulus program takes advantage of the ‘debt brake option’ which allows the government to deviate from the public sector debt ban in the case of extraordinary circumstances such as catastrophic situations: Scholz has said that he will borrow € 156 billion to help cover these costs. The black zero is history – at least for now.

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