Why Germany gets out of this crisis strong - OCO Connect

Why Germany gets out of this crisis strong

With 750,000 companies filed for government support during the corona crisis and a dire IMF forecast of -7.0% GDP growth, Germany’s economy is clearly taking a severe hit in 2020. Despite these troubling figures, some factors give confidence, why the future might be brighter than perceived these days.

This claim is partly driven by an extraordinary flexibility and foresight of the private sector e.g. firms applying WFH, take time for internal strategy revision (“Act now, plan now”) and have the courage to urge the government to link economic stimulus to climate protection (“Petersberg Climate Dialogue”). But foremost the German government itself is playing a crucial role in wisely navigating the country through these challenging times.

 

 

Source: Statista (18 April 2020)

Backed by conservative fiscal policies during the last 10 years, the German government could easily pull out a historic EUR 156 billion economic support programme addressing a stunning share of 60% of German GDP (2019).

Let us briefly explore what is behind that number and who benefits from it?

 

“Kurzarbeitergeld” – furlough payments

The most prominent and directly effective measure is “Kurzarbeitergeld”, which allows companies to keep employees on the payroll, while they are not working. This concept has been in place for many decades but has never seen number skyrocket as in recent days. More than 750,000 companies (ca. 1/3 of all eligible firms) representing 10.1 million workers have already made use of that programme. In order to provide comprehensive and swift support, the share of net income covered was increased from 60% to 70% (67% to 77% for employees with children), while after 6 months the payments will increase further by another 10% each. Quick processing of applications was facilitated by ramping up staff 10-fold in the Federal Employment Agency. For instance, German automotive OEMs Volkswagen, BMW, Mercedes, etc. could respond flexibly, keep valuable staff on during the crisis and getting back to normal without loss of talent and delay.

 

“KfW-Sonderprogramm 2020“  & “KfW-Schnellkredit 2020“ – attractive loan programmes

Targeting companies of all sizes those two programmes aims to fill current cash flow gaps and cover operating expenses and investments. “KfW-Sonderprogramm 2020“ excels by offering easy access to loans, covered credit default guarantees of up 90%, low interest rates (1% – 1.46% p.a. for SME; 2% – 2.12% p.a. for corporates) and the option for loan syndication, where KfW (German state-owned development bank) covers 80% of the risk. “KfW-Schnellkredit 2020” targets SME with 100% indemnification, high and quick approval rates and flexible repayment terms. These loan programmes allow companies to keep their businesses operational and mid-term investments plans alive.

 

Tax & social security alleviations

Companies can apply for cancellation of tax prepayments due to revenue loss in 2020 and can even attribute current losses to its 2019 financial statements to ask for tax return payments. Moreover, companies can ask for deferred social security payments between March and June 2020, if no other programme such as “Kurzarbeitergeld” has been applied for.

 

Export financing guarantees

Against the dire outlook on global trade (decrease of 13-32% in 2020) by the World Trade Organisation (#WTO), Germany tries to secure its companies’ export activities with favourable credit guarantees. As private export banks might become more conservative in securing short-term financing deals, the German government now steps in and extended the list of acceptable countries (EU and OECD).

 

Wirtschaftsstabilisierungsfonds (WSF) for large SME and corporates (250+ employees)

With a total volume of EUR 600b, the WSF provides the framework for large scale financing needs and government interventions. One of the most prominent beneficiaries is Adidas, which received a loan of EUR 2.4 billion backed by private banks with another EUR 600m. As part of the WSF, EUR 100b are attributed to state participation (equity) or silent participation. After incurring a historic operating deficit of EUR 1.2b, German airline Lufthansa is likely to pull this option. As Undersecretary of State Werner Gatzer explained, no change in economic order is intended and pointed to Germany’s acquisition of 25% of struggling Commerzbank during the financial crisis in 2009.

 

Venture Capital (VC) funding for start-ups

While start-ups with a valuation of at least EUR 50m fall under the WSF, the government installed EUR 2b for strengthening the German venture capital ecosystem. It provides additional funds for public VCs to enter and give privately funded financing rounds additional security, offering direct support of up to EUR 1m for start-ups without VC participation. Over the next weeks, a structural fund will be presented to pave the way out of the crisis and bring back agility and scaling potential. Therefore, many scale-ups are likely to survive the current crisis – not only the ones which benefitted from it such as food delivery services, online gaming, or communication platforms.

 

First things first

Nobody knows, when and if the economy will get back to normal (“New Normal”). Right now, powerful measures were diligently put in place and we need to see how their affects unfold over the next months. However, Germany follows a confident path out of the crisis, while other countries still have not managed to #flattenthecurve. Germany has prudently and slowly started to get back to normality since April 20 with the opening of small shops. Having spoken to numerous executives across the country we are seeing widespread optimism and confidence among German businesses to recover fast, maybe faster than their global competitors.

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