ECONOMICS – II

FISCAL POLICY MEASURES OF GERMANY TO

COVID 19 PANDEMIC

Submitted by – M G Suprabha
I Year, III Trimester
NLS ID – LLB/3019/2022
 Introduction
COVID-19 Pandemic took a toll on the entire world economy and the global GDP plunged by
3.9 per cent which is 8.9 trillion dollars, making it one of the most severe drops since the
Great Depression.1 The situation is worrisome from an economic perspective, especially in
export-oriented economies like Germany and this has led to an increase in its debt. 2 Although
Germany was in a decent position before the pandemic the debt situation of the country is
concerning.

This paper aims to analyse Germany’s fiscal response to the COVID-19 pandemic and
examine that spending on investment requires a push. The paper will: (1) Look at the pre-
Covid state of Germany before delving into the fiscal measures undertaken by it in response
to the pandemic; (2) Analyse the said measures and examine the current state of the German
economy in 2022; (3) Examine the effect of the crisis on Germany’s debt and argue that since
its debt to GDP ratio, is lower than 60% as fixed by European Union, it should focus on
investments as the manufacturing sector requires funding for its technological upgradation.

Pre-Pandemic Position of Germany

Germany’s economic status has been decent for the past decade (2009-2019). The German
economy is majorly driven by exports, which contribute to 32 per cent of economic activity. 3
Due to some of the external structural changes such as increasing demand for green vehicles,
the trade war between China and America and Germany’s unbending fiscal disciple caused a
decline in its exports by 4.5% in the last quarter of 2018. 4 Although there was a slump in the
last quarter, there was an increase in exports by 3% in 2018 compared to 2017.5

Before the pandemic struck Germany, it had substantially recovered from the 2008 Global
Financial crisis. It grew at the rate of 1.06% in 2019, which is a 0.08% increase from the

1
John Smith, 'Economic Impact of COVID-19 on PEPFAR Countries' (Global Health: Science and Practice,
May 2021) 325-332, <https://www.kff.org/global-health-policy/issue-brief/economic-impact-of-covid-19-on-
pepfar-countries/>
2
Schaefer, Maximilian, ‘Germany's Dangerous Export Fetish’ (IPS-Journal 27 October 2020) <https://www.ips-
journal.eu/topics/economy-and-ecology/germanys-dangerous-export-fetish-5091/> accessed 11 May 2023.
3
‘Germany Trade and Investment Statistical Note’ (OECD, 2017) <https://www.oecd.org/investment/Germany-
trade-investment-statistical-country-note.pdf> accessed 10 May 2023.
4
ibid.
5
‘German exports in 2018: +3.0% compared with 2017’ (Statistisches Bundesamt, 2019)
<https://www.destatis.de/EN/Press/2019/02/PE19_047_51.html> accessed 10 May 2023.
previous year and the unemployment rate fell from 3.38% to 3.14% in the same year. 6
Germany also recorded a budget surplus of 13.5 billion Euros which is approximately 7% of
its GDP.7 However, when Covid struck, the economy experienced a negative growth rate of -
5% and the unemployment rate increased to 3.86% in 2020 and the output fell by €330
billion.8 Consequently, the government implemented several fiscal policy measures to counter
the economic slump and revive the economy.

Germany’s Response to COVID-19

FISCAL RESPONSE MEASURES OF GERMANY:

Fiscal policy measures mean an alteration in government spending and tax rates to influence
the supply, demand and output in the economy. In times of shocks, the governments would
implement an expansionary fiscal policy by increasing government spending and reducing
tax rates.

EXPENDITURE SIDE:

The government of Germany pushed two stimulus packages of 750 billion Euros and 130
billion Euros which is almost 4% of its two years GDP. The health sector was in a good
position to tackle the covid crisis as Germany spent 11% of its GDP on this sector, but still, it
provided 1 billion Euros to ensure a feasible supply of medical care. 9 A maximum of €25
Billion was used to support the industries incurring losses.10

There was a child Bonus programme, under which €300 was provided per child of low-
income individuals.11 The financial support provided in different sectors such as transport,

6
‘Germany GDP Growth Rate 1971-2023’ (Macrotrends 2023)
<https://www.macrotrends.net/countries/DEU/germany/gdp-growth-rate> accessed 10 May 2023.
7
‘German Balance of Payments in 2019’ (Deutsche Bundesbank Monthly Report March, 2020)
<https://www.bundesbank.de/resource/blob/830320/3e7ab1a001cace6ca47036336f23d24a/mL/2020-03-
zahlungsbilanz-data.pdf> accessed 10 May 2023.
8
‘Coronavirus Pandemic Caused EUR 330 Billion in Economic Losses for Germany’ (Ifo Institute, 2022)
<https://www.ifo.de/en/press-release/2022-02-17/coronavirus-pandemic-caused-eur-330-billion-economic-
losses-germany> accessed 11 May 2023.
9
Outlook for the German Economy for 2020 and 2022’ (Deutsche Bundesbank Monthly Report June, 2020) <
https://www.bundesbank.de/resource/blob/834298/02c70ce36752a83346b75346f7f4470e/mL/2020-06-
prognose-data.pdf> accessed 11 May 2023
10
ibid.
11
ibid.
digitisation and healthcare amounted to €50 billion however the social security transfers were
below 40% of the overall spending.12 The government also launched a ‘Quick Loan
Programme’ which provided liquidity support to the new firms and this amounted to 47
billion Euros for the employee support programme, 13 Bn have been approved. 13 Firms were
also given depreciation funding of 6 billion Euros.14

To avoid unemployment the government launched a short-time work programme, under

which the hours worked by employees are reduced and accordingly the salaries were paid, in
order the balance firms’ revenue losses and encourage firms from laying off employees, the
government allocated 4.1 billion Euros to compensate for the reduced work time.15

An ‘Economic Stabilisation Fund’ of €600 Billion was launched for the corporate sector for
its loan funding and to recuperate the losses during the Covid crisis. Internal funding was also
provided to subsidiary authorities to allocate to the local requirements.16

REVENUE SIDE:

The tax rates on half of consumption goods were reduced from 19% to 16% and the tax rates
on other goods which add up to one-fifth of the purchases, were reduced from 7% to 5% to
encourage consumption. 17
And then again in the second phase standard tax rates were
reduced from 16 to 7%.18 There were tax deferrals given to the companies till the end of June
2022 to ease the burden on the businessmen.19

Analysis of the Fiscal Policy

This paper believes that Germany’s response to the Covid crisis has been strategic and
proactive. During a time of shock like a pandemic, a government should ideally try to

12
ibid.
13
ibid.
14
ibid.
15
Alexander Herzog-Stein and others, ‘Germany and United States in the Coronavirus distress: Internal versus
external labour market flexibility’ (Macroeconomic Policy Institute Düsseldorf Germany, 2022)
<https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9364861/> accessed 10 May 2023.
16
ibid.

17
‘German Consumption-Tax Cut Boosted Spending During Pandemic’ (National Bureau of Economic Research, 2022)
<https://www.nber.org/digest/202201/german-consumption-tax-cut-boosted-spending-during-pandemic> accessed 12 May
2023.
18
ibid.
19
‘Adjusting Tax Pre-payments’ (European Foundation for the Improvement of, Living and Working Conditions,
2022) < https://static.eurofound.europa.eu/covid19db/cases/DE-2020-13_407.html> accessed 13 May 2023.
stimulate demand and raise the GDP by increasing government spending (graph 1) and
decreasing taxes(. The same is followed by Germany.

Graph 1
Graph 2

Source: N. Gregory Mankiw, Macroeconomics (7 th edn., CENGAGE Learning)

Despite the massive slum the economy still showed a growth of 2.9% in 2021 and 1.9% in
2022 that an expected growth of 1.2%.20 The tax cuts decreased consumer prices by a
minimum of 1% and households spent 36% extra on durables, however, the spending was
still not very high, there was an 11% increase in the purchase of semi-durables and a 2%
increase in the purchase of durables.21 The tax cuts led to an overall increase in spending by
34 billion and the tax cuts led to an increase in GDP by 0.2%in 2020. 22 As a result, they were

20
German Country Team, ‘Germany Faces Weaker Growth amid Energy Concerns’ (International Monetary
Fund, 2022) <https://www.imf.org/en/News/Articles/2022/07/21/cf-germany-faces-weaker-growth-amid-
energy-concerns> accessed 13 May 2023.

21
‘German Consumption-Tax Cut Boosted Spending During Pandemic’ (National Bureau of Economic Research, 2022)
<https://www.nber.org/digest/202201/german-consumption-tax-cut-boosted-spending-during-pandemic> accessed 12 May
2023.

22
Michael Funke and others, ‘Has Germany’s Temporary VAT rate cuts as a part of Fiscal policy stimulus
boosted Growth’ (Hamburg University, Department of Economics, Germany, 2022) <
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8964451/> accessed 13 May 2023.
no large decline in consumption (private consumption fell by 3%). 23
This would prevent
deflation and thus reduce unemployment rates. The decrease in tax rates, however, reduced
the tax revenues by 20 billion Euros.24

The shot time work programme was significant in not increasing the unemployment rates, in
fact, Germany was the top performer in retaining employment compared to its fellow EU
members.25 Employment declined by 1.4% from 2019 to 2020, then it started to recover in
2021. The average decrease in the number of hours worked by an employee was 1%,
consequently, the productivity increased by 2.1%.26 Almost 6 million people that is 17.9% of
the employees were enrolled on this programme, who otherwise were vulnerable to losing
their jobs. From May 2020 to the end of 2021 the unemployment rate decreased from 8.3% to
4.7%.

Germany financed these support programmes using its initial budget surplus and it borrowed
a total of €130 billion in 2020.27 These debts were borrowed to manage the fall in revenue and
to finance developmental programmes. As a result, GDP shrank by 5%, better than the
estimated 7.5%. Overall Germany responded proactively to the crisis and its expansionary
policies were decent enough.28

Graph 3-

Graph showing increase in government expenditure in Germany from 1970 to 2021.29 And
Graph 4 shows how an increase in government expenditure will stimulate the demand.

23
‘German household consumption down by 3% in 2020 due to Covid’ (Business Standard, 2021)
<https://www.business-standard.com/article/international/german-household-consumption-down-by-3-in-2020-
due-to-covid-121112300065_1.html> accessed 12 May 2023.
24
Deutsche Bundesbank (n 8).
25
Herzog (n 12).
26
Sheaker Aiyer and others, ‘The Effectiveness of Job-Retention Schemes: COVID-19 Evidence From the
German States’ (International Monetary Fund, 2021)
<https://www.imf.org/en/Publications/WP/Issues/2021/10/01/The-Effectiveness-of-Job-Retention-Schemes-
COVID-19-Evidence-From-the-German-States-474182> accessed 13 May 2023.
27
Deutsche Bundesbank (n 8).
28
‘Record German Public Debt due to pandemic’ (Business DW Germany, 2023)
<https://www.dw.com/en/germanys-public-debt-reaches-new-record-high/a-65171937#:~:text=Germany's
%20total%20public%20debt%20reached,was%20still%20in%20full%20swing> accessed 13 May 2023.
29
‘Germany: Government spending, in dollars’ (The Global Economy, 2022)
<https://www.theglobaleconomy.com/Germany/government_spending_dollars/> accessed 14 May 2023.
 Graph4

Germany: Present and Future Prospects

The Present:

After a slump in the growth rate by 4.6% the economy’s growth was refigured to 2.8% in
2021. When the lockdown measures were eased in the second and the third quarters private
consumption grew by 2.2% and 1.7% respectively. 30 Due to a decrease in demand across the
globe, the exports market and investments saw a slow rate of growth. Automotive exports
which are one of the significant contributors to overall exports, saw a 9.1% increase from
2020 when the impact of the pandemic was severely felt, but it did not reach the pre-
pandemic level and is 8.2% lesser than what was in 2019. 31
30
‘Germany- After 10 Years of Expansion, the Economy Contracted’ (Europa.eu, 2021)
<https://ec.europa.eu/economy_finance/forecasts/2021/winter/ecfin_forecast_winter_2021_de_en.pdf>
31
ibid.
In 2022 private consumption remains constant, especially for services. Exports suffered
because of supply chain disruptions due to the Russia-Ukraine war. However, the automotive
sector has received a huge booking, indicating improved demand.32 Due to the accumulated
savings; consumer spending and investments are expected to increase with the risk of pushing
up the prices and thus inflation.33

Germany has a goal of keeping inflation at 2%. With crises like Corona and the international
skirmishes, inflation at the end of 2021 was 5.3%.34 and the inflation in 2022 was 7.9% which
is a record high since the second world war, this is due to an increase in food and fuel prices
and also due to an increase in energy expenditure by 39.1% has impacted the inflation
levels.35 Despite this, the GDP grew by 1.8 which is lesser than the forecast of 3.6% and due
to an increase in government spending and a focus on maintaining the employment levels,
wage growth boosted from 6.4% to 14.8%, in addition to this unemployment levels have also
fallen from 3.57% in 2021 to 2.99% in 2022 and is expected to further fall this year. 36 With
better ease in investment, production is expected to grow and the budget deficit is expected to
reduce from 2.6% GDP to 2.3% in 2023.37

The future prospects: The need to increase investment spending

A sustainable fiscal policy describes the ability to retrieve government debt without major
alterations to the revenue or expenditure side of the budget. Having been trying to regain
stability, it is necessary to maintain resilience and manage the debt effectively. Failing to
manage the debt efficiently can have damaging consequences, including the implementation
of some strict measures which could put a lot of burden on the population.

Germany had been quite consistent in managing its balance of payments after the great
recession in 2008.38 Germany has learnt its lesson and with its fiscal measures of the black
zero policy, under this, the government would not spend beyond its revenue and maintained a

32
ibid.
33
ibid.
34
How German Economic Machine Broke Down, (Wall Street Journal, 2022)
<https://www.wsj.com/articles/how-the-german-economy-broke-down-exports-11659019301> accessed 12 May
2023.
35
ibid.
36
Aiyar (n 23).
37
ibid.
38
‘Germany balance of payments 2022’ (Deutsche Bundesbank Eurosystem, 2023) <
https://www.bundesbank.de/en/press/press-releases/german-balance-of-payments-in-december-2022-
902110#:~:text=According%20to%20the%20balance%20of,billion%20in%20the%20previous%20year)>
accessed 13 May 2023.
budget surplus until the end of 2019 recording €13.5 Billion. 39 However, this policy was also
criticised for being stringent and not providing funds for investments. when countries across
the world were shifting to green technology, Germany still operated with outdated technology
due to a lack of funding.40

This policy was temporarily halted during the pandemic when the entire country was reeling
under economic pressure. The country borrowed a total of 470 billion euros to fund its
support programmes and also to recover the revenue deficits incurred as a result of tax cuts. 41
The borrowings have kept business running in the country by disbursing 25.8 billion euros
towards non-refundable payments and further, it helped in improving its health supplies. 42
The good thing is that the government, was still able to maintain a budget surplus of 162
billion Euros, though this is less than 2020’s surplus of 278 billion Euros. 43 The balance of
payments fell by 3.5% and currently as on January 2023 the balance of payments is 4.25% of
GDP which is less than the 60% debt-to-GDP ratio limit set by EU.44

Therefore, it can be said that Germany has a strong economic record and the government has
ensured to redeem its debt level to 5.4 billion euros in 2023. Given this debt situation,
Germany should focus more on investment spending and upgrading its manufacturing
technology to newer ones.45 Also, when seen from the point of inflation which is currently
3.9%, is higher than its goal of 2%. 46 So, the solution would be to increase investment
spending, which would lead to an increase in production, thus reducing the market prices for

39
Shahin Vallee and others, ‘Germany’s Debt Brake and Europe’s Fiscal Stance after COVID-19’ (German
Council on Foreign Relation, 2021) <https://dgap.org/en/research/publications/germanys-debt-brake-and-
europes-fiscal-stance-after-covid-19> accessed 13 May 2023.
40
ibid.
41
Michael Nienaber, ‘Germany hikes pandemic-related borrowing to 470 bln euros’ (Returns,2021)
<https://www.reuters.com/world/europe/german-cabinet-hikes-pandemic-related-borrowing-470-bln-euros-
2021-06-23/> accessed 13 May 2023.
42
Guy Chazan, ‘Germany to borrow extra €100bn as pandemic takes toll’ (Financial Times, 2021)
<https://www.ft.com/content/54651914-1074-496c-8ba6-50f853c90c09> accessed 12 May 2023.
43
‘Germany’s current account surplus falls to €162 billion in 2022’ (Deutsche Bundesbank, 2023)
<https://www.bundesbank.de/en/tasks/topics/germany-s-current-account-surplus-falls-to-162-billion-in-2022-
906628#:~:text=2022%20saw%20Germany's%20current%20account,4%C2%BC%25%20of%20gross
%20domestic%20product>
44
Ibid.
45
‘Germany: invest more in infrastructure, digital economy and energy transition for a strong and greener
recovery from COVID-19 crisis’ (OECD, 2020) <https://www.oecd.org/newsroom/germany-invest-more-in-
infrastructure-digital-economy-and-energy-transition-for-a-strong-and-greener-recovery-from-covid-19-
crisis.htm accessed> 13 May 2023.
46
Natascha Hinterlang and others, ‘Gauging the effects of the German COVID-19 fiscal Stimulus Package’
(Deutsche Bundesbank, 2021) <
https://www.bundesbank.de/resource/blob/861414/b40790857434ebee4c853c70ed15622f/mL/2021-11-23-dkp-
43-data.pdf> accessed 14 May 2023.
goods and finally decreasing the inflation rate. 47The government has planned to spend 51.8
billion euros which is 34% more than pre-pandemic spending. 48 This is a welcome step
because the economy desperately needs funding for investment. This departure from the
austere black zero policy is in the best interests of the people and the overall economy
because, technological advancements will help Germany enjoy long-term benefits.

Conclusion
There is no doubt that German economy has done well to support its citizens in the tragic
corona phenomenon. This paper has argued for the use of expansionary fiscal policy in times
of crisis and examined Germany’s fiscal response to the pandemic. It has also addressed the
current state of Germany and its hindrance in spending on investments.

Germany has been quite consistent in its handling of the economic situation and its balance of
payments, however, but there is still much to be done. First, the country needs to shift
towards newer green technology to enhance its efficiency, boost income and increase its
overall output and this can be possible through an increase in investment spending because
that would encourage production, resulting in a decrease in the prices, and this would also
help the country achieve its goal of 2% inflation, down from 3.9% currently.

47
ibid.
48
ibid.