“This Extraordinary Situation Requires Economic Policy Countermeasures”

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First-Hand Information on Economic Policy: Lars Feld Presents Annual Report of Council of Economic Experts at ZEW Mannheim

The COVID-19 pandemic has led to one of the most severe recessions of the post-war period, and there is currently no sign of the economic situation returning to normal. Against this background, Professor Lars P. Feld, chairman of the German Council of Economic Experts, presented the key results of the recently published Annual Report 2020/21 on 8 December 2020. In its report entitled “Overcoming the Coronavirus Crisis Together; Strengthening Resilience and Growth”, the council calls on the German government to readjust its economic policy. The virtual event took place as part of the lecture series “First-Hand Information on Economic Policy” at ZEW Mannheim. ZEW President Professor Achim Wambach moderated the subsequent discussion with the speaker.

In his presentation, Feld focused, among other things, on the economic forecast for the current and next year. “The COVID-19 pandemic and its consequences will continue to haunt the German economy for some time to come,” he concluded. The German Council of Economic Experts expects the German economy to contract by 5.1 per cent in the current year, but to grow by 3.7 per cent in 2021. “However, we will not reach the pre-crisis level before 2022,” said Feld. For the euro area, the council expects the economy to contract by 7.0 per cent this year and then grow by 4.9 per cent next year. In the forecast for 2021, however, the council members had only taken into account the moderate restrictions that currently apply in many European countries, and not a major lockdown. If further, more severe restrictions are to be imposed, this forecast will probably no longer be accurate, Feld noted.

Not losing sight of the long-term challenges

In the further course of his presentation, Feld addressed long-term challenges for the German and European economies. He cited the decline in productivity growth, technological change and in particular digitalisation, the transformation toward a carbon-neutral economy, and demographic change. “Economic policy,” Feld said, “should seize these opportunities and create the framework conditions for a resilient and forward-looking economy.” ZEW President Wambach and the council chairman went on to discuss details of the report. In addition to fiscal policy, productivity and climate issues, the discussion also focused on pensions, in particular the question of lifting the retirement age, as well as the possible lessons to be learned by Europe from the COVID-19 crisis. The discussion also included numerous questions that the approximately 230 viewers attending the event via a live stream had submitted to ZEW in advance.

Overcoming the pandemic through monetary and fiscal policy measures

In his presentation, Feld further focused on the stabilisation policy of the German government in the coronavirus crisis. In his opinion, “this extraordinary situation requires economic policy countermeasures.” He explained that extensive monetary and fiscal policy measures helped to stabilise the economy very quickly during the crisis, not only at the national level in Germany and other European countries, but also at the EU level. In Germany, the scope of the federal government’s fiscal policy measures amounts to around 40 per cent of gross domestic product (GDP). However, by far the largest share of this is accounted for by loans, guarantees and sureties. It remains to be seen whether these measures will be effective. The council assumes that the stimulus measures, and in particular the July 2020 aid package, will positively impact GDP growth by 0.7 to 1.3 per cent. With regard to the cut in value-added tax, Feld said, the council is “somewhat sceptical”: on the one hand, the economic effect depends on the cut being only temporary and not extended, and on the other hand, also on how much of the reduction is passed on to consumers. The council expects a little more than 50 per cent. “This is an expensive, poorly targeted measure that is likely to have only a moderate economic effect,” Feld said. The council therefore prefers an expansion of the possibilities for tax loss carry-backward for companies to a VAT reduction.

In the case of stop-gap aid in November and December, Feld is of the opinion that “too much is being paid.” He pointed out that it is simply too lavish to take the previous year’s month’s sales as a basis – it would actually be enough to pay fixed costs and an imputed flat-rate entrepreneurial wage and not variable costs as well. From an economic policy point of view, these measures were unnecessary, Feld explained, but they were implemented for legal reasons: “They want to prevent innkeepers from taking legal action.” In order to also be able to respond appropriately to future crises, leeway for fiscal and monetary policy should be created again in the medium term. “As soon as the economic situation has improved sustainably, we should definitely return to consolidation” and to the regulatory limit of the debt brake, Feld said.