In an interview, Clemens Fuest, one of Germany’s top economists, discusses the impact of the coronavirus on governments and business. He says bankruptcies are inevitable and that the effects of the crisis will be with us for a long time to come.
DER SPIEGEL: Mr. Fuest, in recent months, the state has intervened in everyday life and in the economy in an unprecedented way – with rules on the public’s behavior, economic stimulus programs and subsidies. Was it all necessary?
Fuest: By and large, the government has acted correctly, both in the fight against the coronavirus and in terms of economic policy. In a crisis like this, the markets don’t function properly, so the state should intervene. However, it is equally important that politicians find a way out of the emergency measures once the acute crisis passes. We have to be careful and make sure that we do not fall into a state-controlled economy.
DER SPIEGEL: Do you see that danger?
Fuest: Yes. I think there is too much talk about public spending and too little about the necessary freedom for the private sector. Our prosperity isn’t generated by the state, but by entrepreneurs and workers. Things won’t be as smooth this time as they were after the financial crisis, when the economy quickly regained momentum.
DER SPIEGEL: When the virus began spreading, the government froze large parts of the economy. Was the lockdown excessive?
Fuest: No. Experience from previous pandemics like the Spanish flu suggest that the economic damage will be smaller if the disease is fought with determination. As long as the spread of the virus continues, people reduce their economic activities on their own. They consume and produce less because they are afraid of infection. The virus must be contained before the economy can recover. The contradiction between health and economic interests, which has been frequently discussed in the corona crisis, doesn’t really exist.
DER SPIEGEL: Nevertheless, many companies have accumulated gigantic losses and now have to be rescued by the state, through loans or direct equity investments. Are we facing a kind of corona socialism?
Fuest: I hope not. It may be right for the state to take a stake in certain companies to save them from bankruptcy. But the government should then also impose conditions – that companies temporarily can’t pay out dividends, for example. It would be wrong for the state to interfere in operational business.
DER SPIEGEL: But the state is now the new co-owner. Doesn’t it have the duty to press for environmentally friendly production methods, for example?
Fuest: No. If the state wants to protect the environment, it must impose conditions that apply to all companies, not just those in which the state holds shares. It is right to limit executive bonuses (Eds: As the German government has done in firms it has bailed out in the form of share purchases.) However, setting political guidelines for day-to-day operations isn’t the right course of action.
DER SPIEGEL: Lufthansa is receiving around 9 billion euros from the state and wants to cut 22,000 jobs at the same time. Doesn’t the government need to prevent something like that?
Fuest: The state should not guarantee jobs if the business model no longer works. There are indications that people will not fly as much after the crisis. Lufthansa must prepare itself for this, also by cutting jobs. If you believe the government, it wants to sell its Lufthansa shares as quickly as possible. But it will only be able to do that if the company is economically sound.
DER SPIEGEL: The state has also invested in the vaccine manufacturer Curevac. Did that make sense?
Fuest: No. Curevac is a healthy company. There was no threat of insolvency nor of a takeover.
DER SPIEGEL: Federal Economics Minister Peter Altmaier wants to secure access to a possible corona vaccine and also make sure that a promising high-tech company stays in Germany and is not purchased by a foreign buyer. Is that not reason enough?
Fuest: The German government just tightened up a law that allows it to prevent foreign takeovers. That could be used if it became necessary. If the state is concerned about vaccine supply, it can negotiate the relevant contracts. In this instance, a state holding here is not the right instrument because it could distort competition.
DER SPIEGEL: Isn’t it nevertheless correct for Altmaier to be seeking to secure the supply of vaccines, medication, protective equipment and masks?
Fuest: It was certainly a failure that there wasn’t enough protective clothing and masks available in Germany when the pandemic broke out. But that also doesn’t mean that the government should buy up companies for that purpose.
DER SPIEGEL: The German government wants to become less dependent on China for medical supplies and ensure that more production takes place in Germany. Is that smart?
Fuest: You shouldn’t conflate domestic production with supply security. Even in Germany, an epidemic can explode or manufacturing can be halted for other reasons, in which case domestic production is of no use at all. It is better to ensure that there are several suppliers from different countries.
DER SPIEGEL: Global trade has further weakened as a result of the crisis. Supply chains have been fractures and protectionism is on the rise. Does it not make sense to make the economy more nationally focused?
Fuest: On the contrary. The solution currently lies in more globalization, not less. Those obtaining their primary products from a single source in China would be wise to acquire additional suppliers in Vietnam, India or Mexico. Just as it is advantageous to deliver your products all over the world, rather than limiting yourself to one buyer. After the financial crisis, German industry benefited from the ability to sell cars and machinery not only in the weakening Eurozone, but also in the booming markets of China and North America.
DER SPIEGEL: The German government has launched a 130-billion-euro economic stimulus package to boost the domestic economy. Is that enough?
Fuest: It is the right move for the government to give the economy a boost again after the virtual standstill in the spring. But we shouldn’t expect too much from it. It is estimated that the measures will increase economic output this year by only about one percentage point. The coronavirus crisis has led to a sharp decline in production. No economic stimulus package can make up for that loss.
DER SPIEGEL: Finance Minister Olaf Scholz spoke of a program that would “pack a lot of punch,” and Economics Minister Altmaier promised that no company would go bankrupt because of the coronavirus crisis. Too much bluster?
Fuest: There is a rhetorical gray area between wish and reality. I have a certain understanding for the fact that politicians want to spread optimism during a serious crisis. What would we have said if the ministers had speculated at length about how terrible everything would be?
DER SPIEGEL: That is exactly what economists are doing these days. They are predicting a wave of bankruptcies in the autumn.
Fuest: It will not be possible to avoid insolvencies, but it remains to be seen whether there will be a wave of insolvencies. The hope that the fast crash would be followed by an equally fast rebound was overly optimistic. We have to accept that the crisis will last a long time and that jobs will be lost. Even (Germany’s) Kurzarbeit (government-subsidized work furlough) program cannot prevent this entirely.
DER SPIEGEL: What do you mean?
Fuest: The Kurzarbeit program ensures that employees remain in their current jobs. That’s good if the economy looks about the same after the crisis as it did before. If, however, there are fundamental changes, because fewer flights are flown after the coronavirus, for example, then furlough programs can also impede necessary changes.
DER SPIEGEL: During the crisis, the government decided to extend the work furlough allowance. Was that the wrong decision?
Fuest: No, the idea was to provide security to the affected people and to promote consumer spending. But the longer the crisis lasts, the more imperative it becomes to allow for structural change.
DER SPIEGEL: What can the government do?
Fuest: It could promote training and the creation of new companies. It could reduce bureaucracy for companies and lower their tax burden.
DER SPIEGEL: Many companies currently aren’t generating any profits anyway, so what’s the point of tax breaks?
Fuest: In the current crisis situation, the focus should be on loss compensation and accelerated depreciation. But it terms of perspectives, it is important that we reduce the corporate tax to 25 percent and announce the change quickly, as many countries around us have done.
DER SPIEGEL: Once the crisis is over, the first thing we need to do is reduce sovereign debt. Wouldn’t that speak for higher taxes?
Fuest: When economic growth returns, the national budget will receive automatic relief. If that isn’t enough, then both expenditure cuts and higher taxes will have to be considered. But then it’s not corporate or income taxes that should be raised, but rather the VAT or property taxes, which are less hostile to growth.
DER SPIEGEL: In the crisis, small incomes are proving to be the main burden. And you want to increase the value-added tax, which puts a particular burden on low-income earners?
Fuest: It will only do so if it is passed on to consumers in the form of higher prices. But we are seeing, particularly with the reduction in VAT, that this is only happening to a very small extent. Nevertheless, social transfers like the amount paid through Germany’s Hartz IV long-term welfare program should be increased to offset the burden created by a VAT increase.
DER SPIEGEL: Will the coronavirus crisis increase inequality?
Fuest: It is expected that the crisis and accelerated structural change are likely to cause an even greater divergence between the incomes of high- and low-skilled workers than before. However, this cannot be offset by the tax and transfer system alone. Instead, we need to invest in the school and education system. We need programs that empower workers to succeed in a more digitalized world, and we need more schooling for people from less educated backgrounds.
DER SPIEGEL: Some 750 billion euros are to be funneled through the European Union recovery fund to countries especially hard hit by corona. Is this the right instrument?
Fuest: I am in favor of the fund. It is right to show solidarity now, but the aid should support reforms that strengthen growth and employment.
DER SPIEGEL: Is there enough willingness to reform?
Fuest: We have to wait and see what reform plans the countries applying for aid present. But we shouldn’t fall into the old mistake of wanting to govern individual member states from Brussels. The economic problems can only be solved from within the countries themselves. It is therefore best for them to present reform programs themselves. Italy has already announced a package of reforms that contains some very promising elements, including more public investment and less bureaucracy.
DER SPIEGEL: Will the recovery fund be enough, or do you expect a new euro crisis?
Fuest: The fund is a help, but it cannot change the fact that some countries in Europe – Italy in particular – are experiencing difficulties because they have had little growth at all for years and their already high sovereign debt loads have risen again as a result of the crisis.
DER SPIEGEL: How can these countries get out of the debt trap?
Fuest: The ideal way would be to grow out of debt. If that doesn’t work, it will be difficult. A debt cut would be conceivable, but in Italy’s case it would primarily mean losses for domestic savers. It would also be possible to reduce part of the debt by introducing a temporary wealth tax, possibly limited to real estate, to prevent capital flight. That would cause a further slump in economic growth.
DER SPIEGEL: At the moment, the European Central Bank, with its low interest rates, is ensuring that the country’s sovereign debt load is sustainable. Can this work in the long term?
Fuest: The ECB’s low interest rate policy can continue for a long time, unless inflation returns.
DER SPIEGEL: So, you still have faith in the idea that the ECB would actually raise interest rates then?
Fuest: There is cause for concern that the ECB might hesitate to take action against rising inflation, especially given the tremendous political pressure there would be to keep interest rates low. However, that cannot be sustained for long. A policy of low interest rates despite rising inflation would cause investors to sell government bonds en masse. That’s why it is dangerous to expect central banks to help highly indebted countries. So far, though, there are no concrete signs of impending inflation.
DER SPIEGEL: Mr. Fuest, we thank you for this interview.