On 9 March 2020, the German DAX tumbled 8.2%, a loss just shy of the single-day decline witnessed on 11 September 2001. The number of people out of work was one important indicator of the magnitude of the crisis. In Germany, the ranks of short-time benefit recipients swelled to a record six million in April 2020, up from 100,000 at the end of 2019. By way of contrast, in the US (which lacks a wage replacement programme for furloughed employees), the official unemployed rolls grew from 5.8 million in February 2020 to more than 23 million in April 2020. The lockdowns led to collapsing demand in numerous industries, including hospitality, lodging and entertainment. At the same time, the pandemic impeded various types of work activities, disrupting international supply chains. As concern grew that a major recession was looming, macroeconomists in governments, central banks and advisory bodies stepped to the forefront, recommending various policy actions to prevent a daisy chain of defaults and keep the wheels of the economy turning. Macroeconomics, as the name suggests, looks at the big picture, not at the individual players in the economy.
Drawing on experience from past crises, the German government promptly created an economic stabilisation fund worth 600 billion euros to reassure markets it would backstop corporate liquidity. Furthermore, the short-time work programme was expanded, to signal that labour would not be a sacrificial lamb in the lean times ahead. As a further measure, the government provided significant financial grants to ensure that even smaller companies, some of which had experienced massive revenue losses, were able to stay in the market.
The ECB also took rapid action, creating a 1.85-trillion-euro pandemic emergency purchase programme (PEPP), which reduced borrowing costs for European companies and Member States. At the same time, the ECB avoided the mistakes made before; there was no abortive attempt to raise the prime interest rate, as had occurred in the last crisis. In terms of stimulus measures, the EU has also adopted a 750-billion-euro recovery and investment plan, titled Next Generation EU.
While the European economy is still facing economic headwinds, macro performance has been better than expected, thanks to these measures. The economy is growing again and business sentiment is positive. Europe has not been roiled by a sovereign debt crisis, as occurred in the years following the financial crisis. Moreover, R&D investment in Germany has remained strong: According to the ZEW Innovation Survey, private-sector spending on innovation only declined two per cent in 2020. By way of comparison, during the global financial crisis, spending fell 11 per cent.
While crisis management at the macro level has been impressive and mostly uncontroversial, the same cannot be said for the micro and operational levels. In his book, Bonn economics professor Moritz Schularick vividly describes how Germany “stumbled through the crisis”. This includes missteps in medical equipment procurement, or – at the European level – the bungled vaccine roll-out, as well as the delayed provision of aid funds, which were both highly susceptible to fraud and poorly targeted.
Given the novelty of the challenges faced in the pandemic, policymakers have been engaged in “learning by doing”, underscoring the need to retrospectively evaluate enacted policy measures. One highly controversial policy was the German decision to temporarily reduce the primary VAT rate. Critics argued that insofar as companies simply pocketed the difference, it would do little to stimulate demand. Yet initial studies show that companies did in fact predominantly pass along the tax benefit to customers.
Clearly, the unbiased evaluation of policy measures requires political will. After the financial crisis, for example, no evaluation was made of whether the measures taken to stabilise the financial sector were suitable and proportionate.
Two issues will require particular attention in the evaluation of the policy response to the pandemic: One key issue is data availability. Clearly, lack of access to real-time data in combination with fractured datasets were major barriers to an effective crisis response. For example, Germany still lacks reliable real-time data on bankruptcy rates and market exits. Accordingly, the public and private sector creditors are forced to grope in the dark when it comes to anticipated default rates, as forecasts based on historical data only have limited value, and the forward-looking indicators currently in use are not fully reliable.
Second, in the domain of crisis management, policymakers should avail themselves of the latest economic findings. Heeding the empirical insights furnished by market design researchers, for example, could have improved vaccine procurement. Similarly, lockdown and vaccine communication measures could have been enhanced through field experiments and closer consultation with behavioural economics.
Our understanding of how to combat economic crises has improved steadily in recent decades, thanks in no small part to advances in economics research. In this connection, numerous ideas once viewed as controversial are now considered common wisdom. However, the translation of general macroeconomic insights into effective policy on the ground invariably entails frictions. Accordingly, economists would be advised to keep an eye on the practical dimensions of their work, for economic policy recommendations must be tailored to the exigencies of the particular.