Germany boosts investments to bolster economy amid coronavirus fallout

A photo taken on March 6, 2020 shows the German share price index DAX graph at the stock exchange in Frankfurt.
A photo taken on March 6, 2020 shows the German share price index DAX graph at the stock exchange in Frankfurt. PHOTO: REUTERS

BERLIN (BLOOMBERG) - The government of German Chancellor Angela Merkel has taken its first steps to help companies and workers affected by the fallout from the coronavirus outbreak and will invest an additional €12.4 billion (S$19.6 billion) between 2021 and 2024.

After more than seven hours of talks on Sunday night, Dr Merkel's coalition loosened rules for short-term work compensation, making it easier for big companies heavily affected by the virus, like airline Deutsche Lufthansa AG, to apply for aid to offset wages when they are forced to temporarily halt work.

"No company in Germany should go bankrupt and no job should get lost due to the coronavirus," the coalition said in a statement after the meeting.

Pressure for Germany to act intensified in the days before leaders of Dr Merkel's Christian Democratic-led bloc and the Social Democrats met in the chancellery in Berlin. The death of the first German from the coronavirus, a 60-year-old man who vacationed in Egypt, added to the pressure. While short of the full-blown stimulus package that many economists and investors urged, Germany's government sought to walk a fine line between reassuring business and avoiding public panic.

Dr Merkel's coalition could not agree on other measures like an accelerated phase-out of the so-called solidarity tax, which helped pay for reunification, or an expansion of funds for state-backed loans and guarantees to ease a cash crunch for companies affected by supply and demand disruptions.

The clearest sign that the virus was hitting the German economy came last Friday, when Lufthansa slashed capacity by as much as 50 per cent.

"The impact on our booking situation is immense," chief executive officer Carsten Spohr said in an internal memo to employees seen by Bloomberg. "We must assume that it may take months before we will see first signs of stability," he said in the Friday message.

German companies cut spending for a third quarter at the end of 2019, leaving the economy vulnerable to supply chain havoc caused by the outbreak. Gross domestic product stagnated in the fourth quarter, slowing the annualised pace of growth to 0.3 per cent.

While Germany has Europe's fullest budget coffers, Dr Merkel's government has long resisted pressure from the European Central Bank and other institutions to unleash its fiscal power with a stimulus that might benefit the region's wider economy.

European finance ministers were warned last week that a prolonged coronavirus outbreak in the region could threaten "cascading effects" stemming from companies suffering squeezed liquidity, which could then be amplified by financial markets.

EMPTY STADIUMS?

Germany is stepping up efforts to slow the virus spread. Health Minister Jens Spahn on Sunday proposed cancelling events of more than 1,000 people, a move that would rule out most professional sporting events and big concerts. Germany's professional soccer league vowed to finish the season, but said it would work with the authorities about holding matches, opening the door to playing in empty stadiums.

 
 
 
 

Eliminating the solidarity tax - a 5.5 per cent surcharge on income - could shore up domestic demand. The tax, levied after the collapse of the Berlin Wall to help fund infrastructure in the former communist East, generated nearly €19 billion for the German government in 2018. It had been eliminated for 90 per cent of taxpayers by the coalition - a cut that had been set to take effect in 2021.

Mr Olaf Scholz, Dr Merkel's Social Democratic finance minister, had pushed for moving forward the reduction of the tax this summer. He also championed a plan to take on €42 billion of debt from cash-strapped communities in an effort to divert local coffers to infrastructure projects, such as school and road repairs.

RECESSION WARNING

Dr Merkel's CDU had previously ruled out a more sweeping stimulus package to stem the damage wrought by the virus outbreak, arguing that a surge in public spending won't address worries among consumers and investors.

That flew in the face of growing calls by industry groups for more action. The country's influential industry federation BDI last Thursday warned of a recession and urged the government to consider stimulus measures.

The meeting was overshadowed by the refugee crisis at the Greek-Turkish border and a conflict between Dr Merkel's CDU-led conservative bloc and the Social Democrats over the question of whether Germany should let some of the refugees into the country. The government agreed to help between 1,000 and 1,500 children who need medical treatment in the context of a European "coalition of the willing".