Vistra Insights

Effective crisis management should attract foreign investors to Germany

Like other countries, Germany was hit hard by the coronavirus pandemic. Over 200,000 cases were reported in a population of 83 million, and shops, offices and factories shut their doors for weeks. As a result, consumer spending, imports and exports, declined sharply across the board.

Economic activity in the year’s second quarter shrank by over 10 percent  compared to the same time period last year — the worst downturn the nation has experienced in 50 years of tracking financial data.

It sounds like the same gloomy story repeated across Europe, much of Asia, the U.S. and other advanced nations (the situation in developing countries is much worse), until you look at employment figures. Employment in Germany has not contracted to nearly the degree it has elsewhere, providing the country with an unusual level of economic stability with which to weather the crisis. Germany’s effective pandemic response, when viewed in combination with other factors, may make the country an attractive choice for foreign investment.

Helping businesses ride out financial storms

At the end of the second quarter, Germany’s unemployment rate stood at 4.3 percent, much lower than the 7.1 percent rate in the EU as a whole and the 11 percent rate in the U.S. 

The lower rate was the result of Kurzarbeit (literally “short work”), a government program Germany has used since the early 1990s to help businesses avoid layoffs in times of economic stress. When demand for goods or services is severely curtailed, the government provides employers with 60 percent of employees’ wages (workers with children get more), enabling companies, for example, to cut their working hours down to 30 percent of normal while still paying staff nearly their full salaries. 

Paying workers during a crisis boosts consumer spending when it’s critically needed. The program also allows companies to retain the talent it will need after a crisis ends, avoiding recruiting and rehiring expenses. 

Germany rolled out the Kurzarbeit program during the global financial crisis of 2007-09 and became the only nation that did not experience an employment downturn during that period. In fact, unemployment fell by 0.9 percent to 7 percent, while rising by 3 percent to 8.6 percent for OECD countries as a whole.

The pandemic posed a more serious challenge, as nearly all industry sectors were affected. Germany broadened the program to cover 70 percent, then 80 percent of worker income, instead of 60 percent. It also eased rules for company participation and extended the program’s duration from the standard six months to 21 months. The program currently covers over 6.7 million workers.

Many economists have lauded Germany’s employment program, and the IMF has called it a "gold standard." Though other countries have adopted similar provisions, some have been criticized for bureaucracy or for overspending funds at times when they’re not necessary. 

Stimulus money

In addition to the Kurzarbeit program, Germany unleashed a $145 billion stimulus package, one of Europe’s largest and bigger per capita than the program in the U.S. It includes spending to support the manufacture of electric cars and other green investments, as well as tax relief for families.  

Even with all the aid Germany is providing, some sectors of the economy are likely to experience a lengthy recovery. Disruption in global supply chains will slow manufacturing and distribution, and lowered demand for exports will slow sales until trading partners begin to recover. If a second disease outbreak occurs, the economy will slow further.

Germany’s debt ratio will also rise as a result of all the spending, but because it was low before the crisis, the country has a better cushion than most. Surveys show that German businesses are increasingly optimistic about the future.

Investing in Germany

Germany’s effective management of the current crisis has gained the country respect among investors and trading partners. Even before the pandemic, its political and economic stability, low debt and manufacturing prowess made it an economic powerhouse in the EU. The country also has a highly skilled workforce and a growing technology sector supported by government investment in research and development. 

Though foreign direct investment has slowed amid the uncertainty of Brexit and U.S. tax reforms encouraging asset repatriation, Germany continues to be a significant investment target for the U.S., China, the UK and continental Europe. If it can successfully reduce dependence on exports through the diversification and green manufacturing initiatives it has undertaken and improve growth in the region that was once East Germany, economic performance could reach new heights. Investing in a stable environment is a lure during hard times, and the upside potential further enhances its appeal.
 

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