Germany's Economy Is Sicker Than You Think

(Bloomberg Opinion) -- There’s no question that Germany has done relatively well during this annus horribilis, and that the administration of Chancellor Angela Merkel deserves most of the credit. But the country could soon have a different problem. The same government policies that worked so well in the first phase of the corona-recession could do major damage in the second phase and thereafter.

Germany can certainly be proud of what it has achieved this year. It “flattened the curve” of Covid-19 transmission early on. And with a dizzying array of stimulus spending and other measures, it has pumped some 1 trillion euros ($1.18 trillion) into its economy.

Thanks to all this, output has been growing again since May. The government now reckons the contraction for the whole year will be milder than originally assumed, at “only” minus 5.8%. By early 2022, the economy should be at pre-crisis levels again. Economy Minister Peter Altmaier (pictured) has been flaunting V-shaped recovery charts.

In particular, Germany has been good at saving jobs. It’s done this in part by suspending normal bankruptcy rules, thus keeping more employers afloat. Simultaneously, the government has used a century-old policy tool to keep employees in their jobs even if they have no work to do. These measures kept unemployment at 4.4% as of July, when the average was 7.2% in the European Union and 10.2% in the U.S.

This now-famous policy instrument is called Kurzarbeit, literally “short-time work.” In a nutshell, the government subsidizes firms to keep workers on their payrolls even when idled. The employees continue getting most of their normal paychecks and are ready to return to work as soon as there is renewed demand. Kurzarbeit was a big reason why Germany emerged relatively unscathed from the Great Recession of 2008-09. Viewed as the international “gold standard” of work-benefit schemes, it’s been copied across Europe and beyond.

But the subsidization of work not actually done and the de facto suspension of insolvency procedures were only meant to be temporary measures. And yet, the Merkel cabinet recently prolonged both programs. Kurzarbeit has been extended through the end of 2021.

The fear among many German economists is that the combination of these policies will create “zombie companies” — firms that should really die and exit the market because of problems unrelated to the pandemic, but that are instead kept alive artificially. An estimated 550,000 firms could already be zombies, according to one estimate, and this could grow to perhaps 800,000 next year.

The even deeper fear is that this zombification eventually infects even healthy firms and removes the pressure for them to restructure. As I described in January, many economists were predicting the end of Germany’s recent “economic miracle” even before Covid-19, unless the country prescribes itself radical industrial, technological and cultural updates.

One reason for concern is demographics: This is the decade when Germany’s baby boomers begin retiring in huge numbers. Another is a creeping loss of competitiveness in sectors that are central to Germany’s manufacturing economy, from cars to machines. A third is a cultural resistance to change that keeps Europe’s largest economy surprisingly analog in an increasingly digital world — it continues to be a maker of “stuff” in a universe of data.

Germany is a place where people still file expense reports on slices of dead trees. It’s the country that ranks last among seven in a new survey about online learning during the lockdowns, with half of German parents saying that their schools offered none at all. And it’s an economy that just plummeted by 52 ranks in an analysis of “digital risers” and laggards.

There’s hope that Covid-19 could accelerate some of the necessary changes. After this spring’s stampede into home offices, for example, just over half of German companies in one survey claimed they’ll get digitally savvier. But those were human-resources managers being polled. There’s no sign yet that the makers and suppliers of Germany’s gas-guzzling cars will get any closer to competing with the U.S. or China in artificial intelligence, which they’ll need to do to build the self-driving cars of the future.

The Merkel government deserves kudos for going all out in rescuing the Germany economy this year. But in extending short-term measures for the long haul, her right-left coalition seems to be more concerned with keeping the peace until next fall’s election than with preparing Germany for the bigger challenges to come. 

These will require wrenching reforms in welfare and taxation and a long-overdue upheaval in Germany’s industrial, service and financial sectors. As Warren Buffett, that doyen of harder-edged American capitalism, has observed, it’s only when the tide goes out that you discover who’s been swimming naked. Germany can keeping pouring on money for a while longer, but it can’t prevent the ebb.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andreas Kluth is a columnist for Bloomberg Opinion. He was previously editor in chief of Handelsblatt Global and a writer for the Economist. He's the author of "Hannibal and Me."

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