Corona crisis: experts warn of new sovereign debt crisis

Corona crisis: experts warn of new sovereign debt crisis

The coronavirus crisis is fueling massive worries in the executive levels of the German economy about a sharp slump in economic power. The Ifo Business Climate Index – an important indicator of the business outlook for companies – fell to 87.7 points in March. In February it was still at 96 points. This is the strongest decline since 1991 and the lowest since August 2009. “The German economy is falling into recession,” said Ifo President Clemens Fuest.

Because of the global effects of the corona virus, most economists fear a significant decline in economic output in 2020 for the export-heavy German economy. For comparison: In the financial crisis in 2009, the economy slumped by almost six percent. If the corona crisis persists, the minus in 2020 could be even bigger.

The Ifo plans to announce the final results of its monthly survey of 9,000 companies on March 25. “In view of the unusual situation” due to the virus pandemic, the Munich researchers have now provided preliminary data for the first time since the survey began in 1949. For the business climate, managers from industry, the service sector, construction, as well as wholesale and retail are asked to assess their current business situation and to communicate their expectations for the next six months.

DIW warns of sovereign debt crisis

The German Institute for Economic Research (DIW) also sees Germany before the economic crash. “The German economy will surely plunge into recession this year,” said DIW economic chief Claus Michelsen. How severe the crisis will be is currently unpredictable. Two scenarios for the course of the break-in are conceivable. “Either a V, that is, catch-up effects of production and consumption soon after a rapid crash, as was the case with other epidemics such as Sars, swine or bird flu,” said the expert. Then the gross domestic product could only shrink by 0.1 percent.

“But – and that seems realistic at the moment – there can also be an L-course of the economy, in which after the crash nothing is made up for much and consumption and production remain at a significantly lower level,” said Michelsen. “The recession would then be much more difficult.” The DIW did not want to risk a concrete forecast.

Avoiding this scenario is the most important task of politics. “Small businesses and solo self-employed people in particular don’t even know whether they will survive the crisis economically,” said DIW President Marcel Fratzscher. “The important thing now is to provide financial aid quickly and without red tape.” Avoiding bankruptcies and high unemployment should be the top economic policy priority. More international cooperation and European solutions are needed.

Given the spread of short-time work and an expected rise in unemployment, Fratzscher can also imagine helicopter money, with consumers receiving flat-rate money from the state. “This is an option,” he said. At 1,000 euros per capita, this would cost the state a total of around 83 billion euros, which would correspond to about 2.5 percent of the gross domestic product. “That would be feasible for a federal government that is in excellent financial standing,” said Fratzscher. “The German state can still refinance itself at negative interest rates.” He has reduced debts and generated surpluses in recent years.

The DIW chief warned of a new sovereign debt crisis in the euro zone. “Like a virus, it is important to avoid cross-border infection,” he said. Italy is particularly worrying. “Italy has a very troubled economy. It has hardly grown in recent years,” said Fratzscher. “It must be in German interest that Italy doesn’t get into trouble.” Coronavirus bonds, for example, could help.

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