Can Germany Weather The COVID-19 Storm More Robustly Than Other European Countries? – Analysis

By Heribert Dieter

The Covid-19 virus has hit Germany as unexpectedly as other European countries. For a few weeks, Germans thought the pandemic was an issue for Asian countries and not their own. Today, although Germany is severely affected, the situation is not nearly as dire as in Italy and Spain. Germany, with its enormous financial resources and a well-equipped medical sector, appears to be better placed than other economies to weather this storm.

Merkel back in power

One of the most striking effects of the crisis is that Chancellor Angela Merkel is experiencing a revival. The debate over her succession and the next chairman of the Christian Democratic Party have become irrelevant. Merkel is firmly in power, and her popularity is quite high. Ironically, the current crisis has been falsifying the claim she made in 2015 that the German borders cannot be protected. On 7 October 2015, she had argued in a rare television interview that “borders cannot be closed”. Since 16 March 2020, the German government has implemented policies that were previously considered impossible or inappropriate.

Today, the German authorities are desperately trying to regain control over the coronavirus. These blunt measures are a reflection of the previous complacency. If the German government would have acted earlier, say in mid-February, the restrictions could have probably been less severe. The mistakes Germany made and continues to make become evident when setting Germany’s experience against that of Hong Kong. Based on my own calculations, while one in 1,070 citizens in Germany is infected with the coronavirus, the number in Hong Kong is only one in 9,934 inhabitants. Why is a densely populated city-state like Hong Kong apparently more successful in addressing the coronavirus than Germany?

There are some surprising similarities between Germany and Hong Kong in the current crisis. Both are very open economies with substantial fiscal resources, which are proving quite useful today. Both are very dependent on China, if in different ways. And both economies have seen their business models weakened by the crisis. Their response to the pandemic, however, has been extremely different.

Hong Kong treads with caution

The authorities in Hong Kong have been trying to control and monitor the outbreak of the crisis. Fuelled by the experience from the SARS epidemic in 2003, the Hong Kong government quickly implemented measures to control the virus. Schools and universities were closed and now use the online teaching method, and the health authorities continue to document each individual case on several websites. Citizens can identify which train, plane or taxi an infected person has used. The government is using a supercomputer of the Hong Kong Police Force to monitor outbreaks and react against them.

While the Hong Kong government has implemented many measures to curb the spread of the virus, there has been no curfew like the kind implemented in Italy, France, Spain or Germany. From day one, many citizens of Hong Kong have been wearing face masks, which may not be very effective in preventing the user from catching the virus but is useful to curb its spread. Wearing a mask has thus become a symbol of care for others in Hong Kong, where respect for others has been an established social norm. The city has just under 1000 confirmed coronavirus cases, four of whom have died. Considering Hong Kong is a part of China and there has always been an intensive movement of people between the city and the mainland, these relatively low numbers are remarkable.

The measures taken against the coronavirus may have reduced total mortality in the city. Simply put, in 2020, ordinary influenza claimed significantly fewer lives in Hong Kong than the year before, thanks to social distancing and other measures. In 2019, the influenza season lasted 14 weeks and claimed 356 lives. In 2020, the influenza season ended after a mere five weeks, and 113 Hong Kong citizens died from influenza, about two thirds less than the year before. A positive side effect has been the reduction of admissions to intensive care units due to influenza, which dropped from 601 in 2019 to 182 in 2020. Thus, the healthcare system’s capacity to handle Covid-19 cases was higher than it would have been in a regular influenza season. Dr. Joseph Tsang, an expert for infectious diseases, called the reduced influenza cases a “collateral benefit” from the coronavirus outbreak.

Germany’s ex-post approach

The contrast between Germany and Hong Kong is stark. Germans very reluctantly embraced the precautionary measures. Despite the virus wreaking havoc across the world, including in Italy, many Germans thought that Covid-19 would not severely affect them. The German government was equally reluctant in implementing comprehensive measures to stop the spread of the virus. Instead, the federal and state governments implemented what an ‘ex-post’ approach, waiting until the crisis hit — and infection rates skyrocketed — to implement harsh measures.

To be fair, that may have been the only avenue available in a democracy in general and in Germany in particular. Policies that severely curtail the freedom of individuals are always contested, and without evidence, it is incredibly complicated to convince citizens that they should alter their behaviour. In Germany, the use of emergency acts is currently accepted by a vast majority of citizens but perhaps would not have been tolerated at the end of February. As we know from other policy domains, democracies are not very good at implementing precautionary policies.

German policymakers have continued to emphasise that the country is well-prepared for a health emergency. But this is true only on two fronts: have a good number of hospital beds and laboratory capacity. Germany currently has 28,000 intensive care beds, out of which 25,000 are equipped with ventilators. Germany has more hospital beds than most other European countries. According to World Bank data, Germany has 8.3 beds per 1000 people, while France 6.5 beds, Italy has 3.4 beds and the UK 2.8 beds. Even in the US, which has one of the most expensive health care sectors in the world, there are only 2.9 beds available per 1000 people.

The German approach can partly be explained by the confidence in the existing medical resources. But despite having many hospitals, there is a lack of necessary medical equipment such as masks.

Too much restriction?

Like most other European governments, Germany has implemented unprecedented measures to stimulate the economy and to keep businesses afloat. What sets the country apart is its fiscal muscle. After years of economic boom, high levels of taxation and restricted government expenditure, Germany can use its vast financial resources to avoid an economic collapse. In 2019, gross public debt was reduced to 59.2 percent of GDP. Some commentators have suggested that “saving has paid off”. The debate on a possible exit from the measures adopted to curb the spread of the Covid-19 virus has continued. While it appears that the strict rules will remain in place at least until mid-April, Germany might consider a model adopted by many other countries — some restrictions on public life, but a return to the workplace for a significant number of the workforce.

Indeed, estimations by some virologists appear bizarre. Lothar Wieler, head of the Robert-Koch-Institute, which advises the German government, had suggested in mid-March that in an extreme scenario, Germany may have to remain in lockdown-mode for up to two years. Of course, the implementation of the current measures beyond April would risk the stability of many German companies and could lead to massive unemployment, widespread bankruptcies and severe political instability.

Some commentators have already criticised the harsh measures. Hans-Juergen Papier, former president of the German Constitutional Court, has warned that emergency measures do not justify the suspension of civil liberties in favour of a state of authority and surveillance. He said a curfew that has no limitation in space and time most probably represents a violation of the German constitution. Policymakers in Germany and elsewhere must find a balance between protecting their societies as well as protecting the economy. To place the safeguard of citizens’ health above all other considerations is a risky strategy. Without a return to economic activity in the foreseeable future, Germany and other European countries may rapidly be exposed to severe socio-economic problems.

Following the Chinese example?

If Covid-19 is a severe health crisis, but not an unprecedented one, the question arises why governments all over the world, including the German one, are outbidding each other to curb the freedoms of their citizens. One reason might be the rivalry with China. The Chinese Communist Party has been trying to recover from the mistakes made in Wuhan in the early phase of the outbreak by implementing a draconian lockdown.

Today, the Chinese government is portraying itself as one of the few governments able to protect its population from the virus. Explicitly, the Chinese Communist Party has been suggesting that democratic governments are not well placed to combat a serious threat to their citizens. At the same time, policymakers in those societies want to demonstrate their ability to act forcefully, and they have used the Covid-19 crisis to do so. They have simply copied the Chinese blueprint, perhaps prematurely. The precedent set by China may have hurt the ability of politicians in Europe and North America to develop their strategies to combat the virus.

Ray of hope

There are, however, some very optimistic observers in Germany that neither expect a lasting lockdown nor a severe effect on the economy. The Council of Economic Advisors to the government has suggested that Germany may suffer quite limited economic damage from the crisis. In a best-case scenario, they expect a drop five percent drop in GDP in 2020, which would be less severe than the contraction of the economy in 2009. Even if Germany were to stay in lockdown for seven weeks, the reduction in GDP would be limited to six percent.

What will change is Germany’s fiscal position. At the start of the current crisis, the country’s coffers have been well filled. Federal, state and social security funds are said to have liquid reserves of 200 billion euros. In times of crisis, this comes in handy. The federal government has adopted a far-reaching package of measures to mitigate the consequences of the spread of the coronavirus. The cabinet initiated emergency aid for micro-enterprises and self-employed persons. Clinics and practices will be strengthened, and access to short-time work benefits simplified. And the government is helping large companies with an economic stabilisation fund.

That fund has three elements:

• A framework guarantee of 400 billion euro to help companies refinance themselves on the capital market (bridging liquidity bottlenecks)
• Credit authorisation for 100 billion euro to strengthen the capital of companies (recapitalisation)
• A further 100-billion-euro credit authorisation to refinance the special programmes of the state-owned Kreditanstalt fuer Wiederaufbau.

Given the uncertainty about the duration of the crisis and the severity of the economic decline, the German government has had one primary objective: to stabilise the expectation of its citizens. This goal may have been achieved for now, but any significant deterioration of the situation will alter the equation quickly.

A challenge for European and German solidarity

In 2020, Europe is experiencing a problem of historic dimensions. Although there is some solidarity between member states, by and large, each country is fighting the crisis on its own. It is unrealistic to expect Europe to emerge strengthened from the Covid-19 crisis. The nation-state has been the primary source of protection and help, and the citizens of each country will remember that supranationalism, let alone multilateralism, did not provide convincing answers in the crisis.

Of course, there have been nasty episodes during the crisis, and it would be easy to point fingers at the mistakes of others. In an existential crisis, perhaps it is unavoidable for policymakers to act in the national interest. Germany is no exception. The much-criticised ban on exports of medical equipment was implemented after the German government realised that the country did not have sufficient basic equipment (sanitiser, masks) for its own medical personal.

Nevertheless, Germany is contributing significantly to the stabilisation of the European economies. The country’s solid fiscal position, a result of policies that were criticised in the past, today enables Europe’s largest economy to act as a significant provider of demand. Put differently, if Germany were not able to stabilise the purchasing power of its citizens and the capacity of its companies to survive the crisis, Europe’s prospects in a post-Covid-19 world would be much bleaker.

Surprisingly, the crisis may have some positive effects on the Germans’ perceptions of the existing economic and political structures. In the current crisis, the German government is mobilising resources for its citizens, who for years have been funding the state and the social security system with high taxes and high social security contributions. Today, Germans see the benefit of previous frugality. And so, while the Covid-19 crisis will take its toll, the long-term effects may not as bleak for Germany as elsewhere.