Delegation from the Federal Republic of Germany

Position paper for International Monetary Fund

Agenda: ‘Reassessing the measures for post-pandemic economic recovery with special
emphasis on current budget allocation structure’

“We were standing on one side of a massive river of uncertainty and hardship… thanks to the tremendous
hard work of companies in the US, Germany and other corners of the world we’re now seeing the other
side of the river,” – Christine LaGarde, President – European Central Bank

I. Background

Germany weathered the first wave of the COVID19 pandemic relatively well. Although the
pandemic has caused serious losses in social life and economic activities, strong early public health
and economic policy responses have helped control the economic contraction well below the level
of other European powers. Although the economy began to recover in the third quarter, in the face
of a new wave of infections, the outlook has weakened and downside risks loom. Policies should
focus on putting the economy on a sustained recovery path by avoiding scars in the labor market,
protecting vulnerable groups of the population, and ensuring that dynamic companies continue to
operate. Looking further, the focus should be on ‘building better for the future’, focusing on ways
to solve Germany's long-term challenges, such as supporting productivity growth and external
rebalancing, and decarbonizing the economy.

II. Past Actions

Germany’s Post Covid-19 Recovery in Five Charts, illustrates the impact of the pandemic on
Germany and the policies needed for a durable recovery.

1) Germany has to date been relatively successful at managing the pandemic, but the
economic shock has still been profound.

2) Fiscal policy should remain supportive until there is firm evidence of a sustained recovery.

3) Germany’s well established short-time work subsidy, ‘Kurzarbeit’ has played a critical
role in retaining jobs, but cannot by itself fully address the labor market shock.

4) Phasing out support for corporate borrowers during the recovery period will require a
careful balancing act.

5) The German banking sector is broadly resilient, but capital relief and restrictions on
dividend payouts should remain in place until the recovery proves sustainable.
Germany’s COVID-19 Mitigation Measures:

a. Expanding health services:

Budget support represents approximately 1.2% of GDP and is used to increase health and support
services, including the purchase of protective equipment, compensation for hospitals, bonuses for
increasing intensive care capacities, and development support of vaccines and treatment methods.

b. Protecting households:

Kurzarbeit, a critical safety net to protect workers' work and income, has been significantly
expanded. In addition, the government has also increased child benefits, relaxed regulations on
childcare benefits and basic social security benefits for low-income parents, and provided
temporary relief to tenants affected by the pandemic.

c. Provide direct budget support to companies:

More than federal aid programs totaling 80 billion euros provide grants to companies and the self-
employed severely affected by the pandemic. Some state governments, such as North Rhine-
Westphalia and Bavaria, supplemented federal programs by increasing levels of support and
expanding coverage. The government also offers several options to defer taxes and reduce advance
payments, and no tax penalties will be imposed until the end of the year.

d. Provide credit support for enterprises:

The government has rapidly expanded the capacity and the admittance of public loan guarantees
through the National Development Bank, KfW, and the newly created economic stabilization fund
(WSF), which aims to support large and strategically important companies, and other new
provisions. The total amount of guarantees has increased by approximately 826 billion euros,
accounting for approximately 25% of GDP. WSF also includes 100 billion euros for government
capital investment and 100 billion euros for refinancing the KfW special program.

Kurzarbeit (KA) – Germany’s Short-Time Work Program:

Germany’s Kurzarbeit (KA) played an important role during the Global Financial Crisis (GFC)
and is extensively attributed for saving jobs and consenting a swift recovery post-crisis. Its aim is
to strike a balance between protecting employment during the economic crisis and preventing the
labor market from becoming too rigid in normal times.

From the beginning of March to the end of May 2020, the number of workers previously notified
to KA by the employer was approximately 12 million, accounting for a quarter of the labor force.
This number is much higher than the peak application during the global financial crisis, which was
less than 2 million from February to April 2009. According to official estimates, the workers
identified by KA reached a peak of 6 million in April, while the unemployment rate only increased
by about 0.6 million. All departments were affected. Approximately 32% of workers work in
commerce and hotel industries, followed by 29% in manufacturing and 16% in business services.
In contrast, during the GFC, more than 80% of KA workers were active in manufacturing.
 Due to the unprecedented nature of the pandemic, the KA parameters have been suitably adjusted
to more ease and considerable access.

 If only 10% (previously one-third) of employees' working hours are reduced by 10% or more,
companies are now eligible to apply. In addition, KA has been extended to temporary workers.

 For workers facing a reduction in working hours of more than 50%, the replacement rate will
increase from 60-70% (67-77% for parents) from the 4th month and further to 80%. (87% of
parents) from the 7th month.

 The social security aids paid by the employer have been waived. The period of KA was
prolonged to a maximum of 24 months.

 The requirement to withdraw working time account balance and deplete holiday balance before
using KA has been removed.

 As long as the combined income does not exceed the previous net income, KA workers can
earn income from additional work without reducing KA benefits.

III. Possible Solutions

According to the IMF’s latest economic assessment of Germany, priority should be placed on
setting the economy on a sustained recovery path by minimizing labor market scarring, protecting
vulnerable people, and ensuring that viable firms remain in business.

Germany’s COVID-19 Recovery Measures by Government:

1) Promote consumption:
The government implemented temporary value-added tax (VAT) relief from July 1 to the end
of 2020 to boost domestic demand. The standard VAT rate has been reduced from 19% to
16%, and the reduced tax rate has been still reduced from 7% to 5%. In addition, the original
renewable electricity surcharge (EEG) plan for 2021 and 2022 has been reduced, which should
arise demand.

2) Invest in the future:

In June 2020, new government measures included a ‘future package’ of approximately 50

billion euros. The package focuses on supporting green investment, digital infrastructure and
healthcare. This includes investment in green technology and 5G expansion, as well as public
health spending; and subsidies for the purchase of electric vehicles.

IV. Further Recommendations

Germany believes that it is important to strengthen the policies to support a strong and sustainable
recovery, thereby minimizing scarring from the COVID-19 recession and risks to financial
stability. Germany’s recovery package provides temporary broad-based demand stimulus along
with welcome measures to build back a greener and smarter economy after the recession.
Additional fiscal policy efforts, should be guided by the future path of the pandemic and the pace
of economic recovery. Labor market policies should aim to avoid hysteresis, while allowing
structural reallocation of resources once the recovery is firmly entrenched. Financial policies
should remain geared towards preventing systemic risks, while supporting credit supply to the
economy.

A. Keeping Fiscal Policy Supportive:

1. Fiscal policy should remain sufficiently accommodative until there is evidence of a

sustained recovery. Such measures could include:

a) Additional grants to viable firms, reduced social security contributions from low-income
earners, and expedited public investment and spending on climate change mitigation
policies.
b) Though debt is expected to increase in the near term, it should be maintained to remain
sustainable across multiple stress scenarios and should not pose an obstacle to vigorous
fiscal policy action.
c) Strong governance standards and transparent monitoring of implemented measures are
crucial to ensure efficient resource allocation and maintain public trust.

2. Looking beyond the near term, fiscal policy should aim to ‘build better for the future’:

a) The focus should shift to addressing long-term challenges of structural transformation:

potential growth should be boosted by investing in digital infrastructure, encouraging
innovation, and bolstering labor supply.
b) Policy should aim to make medium-term growth greener, by implementing the
government’s ambitious climate investment plan, and more inclusive, by raising the
disposable income of low-income households. These measures should also contribute to
reducing long-standing external imbalances.
c) The structural fiscal balance is expected to improve significantly from 2022 onwards, as
the economy recovers and support measures expire, leaving ample fiscal resources for the
necessary structural transformation, including challenges posed by demographic
developments.

B. Preventing Labor Market Damaging and Growing Inequality:

1. Labor market policies should remain protective to prevent scarring and widening
inequalities:

a) The COVID-19 crisis excessively affects contact-intensive services, with women bearing
a particularly high burden due to their high employment shares in these sectors.
b) To limit damaging and preserve valuable job matches, it is essential that crisis-induced
changes to the parameters of Kurzarbeit, by making the subsidy more generous and easier
to access and remain in place until a sustained recovery is underway.
 c) Since marginal workers, many of them being women, and the self-employed, are not
eligible for Kurzarbeit, the extended basic income should also be maintained until their
labor market prospects improve.

2. As the recovery gains momentum, labor market policies should shift to facilitating the
necessary reallocation while protecting the most vulnerable:

a) The pandemic is likely to bring long-term changes to the economy, such as a shift towards
more remote working and online purchases.
b) Strengthening incentives for job search should be accompanied by policies to reduce hiring
costs for viable firms, for example through bolstering existing hiring subsidies and
subsidies for apprenticeships.
c) Further stepping-up investment in full-time quality care in kindergartens and schools could
help reintegrate women into the labor market, while investments in digitalization and
lifelong learning could enhance labor mobility.

C. Reinforcing Financial Stability:

1. Financial policies should strike a careful balance between unwinding extraordinary

support measures and ensuring banks’ ability to lend.

a) With the gradual cancellation of bankruptcy moratoriums, corporate bankruptcies may

increase. At the same time, as a number of special borrower support measures expire and
the risk of default increases, credit conditions may tighten.
b) In order to maintain financial stability, the government must continue to provide some
direct support to enterprises to ensure a smooth transition, targeting those enterprises whose
operations are temporarily restricted by health risks or social distancing and those that are
critical to the operation of the economy, while promoting the withdrawal of unrealistic
companies.
c) The planned implementation of the EU’s Preventive Restructuring Directive, will help
troubled but viable companies avoid destructive bankruptcy, thereby preserving working
capital and supporting financial stability.

2. The German banking sector is likely to take a significant hit to profits and capital but
remains broadly resilient under the baseline economic outlook.

a) The COVID19 economic recession has put banks facing a higher risk of default and lower
income. However, the existing capital buffers, the temporary relaxation of regulatory
capital requirements, and a series of measures to ease borrowers’ liquidity concerns and
reduce credit risk will help alleviate the impact on banks’ solvency.
b) As businesses and households need time to recover, bank capital reserves must be gradually
rebuilt to minimize interference with the supply of new loans.
c) Bank supervisors should continue to instruct banks to avoid discretionary dividends and
share repurchases until the full impact of the pandemic becomes clearer. They should also
continue to encourage banks to increase non-financial revenue and reduce management
costs through restructuring efforts to solve the long-standing problem of low profitability.
Bibliography

1. [Link]
concluding-statement-of-the-2020-article-iv-mission
2. [Link]
3. [Link]
time-work-benefit
4. [Link]
recovery-in-five-chart
5. [Link]
COVID_Recovery_2020.pdf
6. Statement issued by the International Monetary Fund (IMF) mission, led by Mr. Shekhar
Aiyar, conducted discussions virtually on the 2020 Article IV Consultation from November
4 ‒18.