As Economic Confidence Collapses In Europe, Germany Pays Workers To Stay Home

It’s not surprising, but it’s worth noting nevertheless.

Economic confidence in Europe collapsed the most on record in March, falling to 94.5 from 103.4 in February, the European Commission said Monday.

Believe it or not, that was actually better than estimates. Consensus was for a plunge to 91.6. The range was 75 to 98.4, so one might be inclined to say the index will sink further depending on the evolution of the virus. Note that at least some of the responses were tallied prior to the nationwide shut-ins implemented across the continent.

The services gauge printed -2.2, a total meltdown from February’s 11.1, which speaks to the dramatic effect the lockdown measures are having on the sector, a bastion of stability globally during last year’s manufacturing slump.

As if the projections needed to get any more disconcerting, the German Council of Economic Experts said the world’s fourth-largest economy will shrink by nearly 3% in 2020 in a kind of “best”-case scenario that sees life return to normal by mid-May.

The pessimistic scenario, on the other hand, would find the German economy contracting 5.4%.

Either way, the country is headed for a slump the likes of which hasn’t been seen since the crisis. That would be highly unfortunate on its own, but it’s made even more so considering 2019 was already the worst year in six for the economy, which came into the pandemic still mired in a horrible factory slump.

Germany has generally abandoned its notorious frugality in the interest of guarding against an outright economic calamity.

As a reminder, Europe is attempting to preserve employment as opposed to simply propping up those who have been let go. Consider this, from Bloomberg:

Kaluza + Schmid GmbH, a company in Berlin that helps organize trade fairs, corporate retreats, and other events, was having a good year. Managing director Ruediger Koch says his schedule was so full that he had to turn away business. Then, toward the end of February, as governments in Germany and elsewhere began stepping up efforts to contain the spread of the novel coronavirus, cancellations began rolling in. In the space of a few days, the 80-person outfit lost some 30 projects worth €1.6 million ($1.8 million)–roughly a sixth of its yearly sales.

Koch made a choice unimaginable to most managers in America: Instead of firing his employees, he sent them home and kept paying them. The entrepreneur availed himself of a state-funded program called Kurzarbeit, which translates into short-time work. Dating back to the period following World War II in Germany, it’s designed to help companies weather difficult times without having to resort to mass layoffs, disruptive to businesses and the larger economy. “We would have had to let go pretty much everyone if it weren’t for short-time work,” Koch says. “Now we’re able to hold on to our people and their know-how.”

“The unemployment shock will likely be much bigger in the US”, Deutsche Bank’s George Saravelos writes, adding that “the American fiscal package prioritizes protecting the unemployed via higher benefits and direct payments to households [while] Europe is prioritizing maintaining employment with salary and wage protection schemes similar to Germany’s Kuzarbeit rolled out across the continent”.

(Deutsche Bank)

Historically, Kurzarbeit was primarily used by manufacturers, but due to the nature of the current crisis, Angela Merkel has encouraged companies in the services sector to tap the program.

“While jobless claims have surged [in the US], so have German Kurzarbeit claims”, Deutsche’s Saravleos goes on to say. The difference, he writes, is that “all these workers are all still employed”.

Special Report 2020


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