The state must now cushion the economic impact.
A very deep slump is ahead
By Heiner Flassbeck:
[This article published on 3/23/2020 is translated from the German on the Internet, https://www.nachdenkseiten.de/?p=59510.]
In times when a virus dominates the daily news, many people are concerned about the economic situation in the country. They wonder whether their jobs and businesses will still exist after the 'corona crisis'. The moderator Milena Preradovic spoke on her channel Punkt.PRERADOVIC with Prof. Heiner Flassbeck about the current situation and his proposed solutions. Flassbeck expects a slump in the gross domestic product of 20 to 30 percent. He says this is a one-off shock that has nothing to do with a normal recession. The macro-economist is now calling for drastic, but above all unbureaucratic and quick, stabilizing measures, as well as an end to the debt brake, austerity policies and an abolition of the criteria of the Maastricht Treaty. Christian Goldbrunner has transcribed the interview.
Milena Preradovic: Heiner Flassbeck, ex-top economist at the UN and ex-secretary of state in the Federal Ministry of Finance. Bonjour to France. What does it mean when Volkswagen, Daimler, Audi, BMW close down in Germany?
Heiner Flassbeck: It really does mean a major crisis, we have never experienced that before. There has never been anything of this magnitude before that so many companies have to close. It's not only car manufacturers, but many others as well, either because they don't want to put their workforce at risk or because they no longer have any demand. Nobody is buying cars at this time. That is quite clear, and it will indeed be a very, very deep economic slump, and it is regrettable that Mrs Merkel did not speak about it clearly and plainly last night.
The economy does not seem to be such a big issue at the moment. Everything is focusing on the medical side, on the virus. Is there already a fear of this economic crisis behind it in your opinion?
Yes, there is certainly a subliminal fear, but it is not open, it has to be discussed openly. Mrs Merkel should have said: People, the economic situation is also getting really serious, we will experience a deep slump. So you can calculate different scenarios, but if the whole thing takes three or four months, we are talking about a slump in gross domestic product of 20 to 30 per cent. That has nothing whatsoever to do with a normal recession. You shouldn't talk about recession anymore, it has nothing to do with a normal shock. It is a very, very deep slump, which will hopefully be followed by a recovery afterwards, but first of all this slump is incredibly deep because many areas are simply standing still. You can't just shut down the economy and then hope that nothing happens. Yes, there is a very deep slump and the state must now cushion it. Some people have understood this, the European Central Bank (ECB) has now reacted, the dimension is good, 750 billion, but I believe that the states have not yet understood what is in store for them.
In France, Macron is talking about nationalizing companies that are under threat. Could you imagine the same thing for Germany?
Yes, that can happen at times, but first of all it's a question of keeping the companies alive. Nationalization can be part of that, but that is certainly not the general solution. I think the only general solution is - as Germany intends to do in principle - to grant loans through the banks, because that has to happen quickly. It has to happen in the next few days - you can't spend months checking whether the company is creditworthy or not - via the banks, which are guaranteed by the state or the Kreditanstalt für Wiederaufbau [KfW]. Every company should apply for two to three months for a loan that gives it some breathing space, so to speak. With the application it should go to the bank and say, well, I need xyz. That should be checked very quickly, and then the state should say, yes, I'm behind it, we'll make a guarantee so that the bank doesn't get stuck with it.
Companies must be supported, probably the banks must also be supported, but of course people must also be supported.
The government in Germany is still talking about the zero deficit it wants to keep. Is that so tenable?
That's absolute nonsense. The national debt will increase dramatically. If the gross domestic product collapses by 20 to 25 percent, the national debt will also increase in this order of magnitude, i.e. from now 60 percent of the gross domestic product to 90 or maybe 100 percent. But that doesn't matter at all, so of course the black zero is a thing of the past. It is now being said that we must make a special arrangement for the debt brake. That is absolutely ridiculous, it is a completely different dimension, a huge dimension. In Germany we are talking about 300 billion that the state has to spend on workers and companies. In Europe, as the ECB has said, it is a matter of 600 to 750 billion, which the ECB is printing money on, so to speak, to refinance the states. Let us not delude ourselves; it is nothing other than printing money. That is not possible directly because we in the EU have a strange constitution. We cannot do it directly. So the states get into debt on the market, but to prevent interest rates from rising, the ECB buys back the bonds so that interest rates stay low. That is nothing other than financing through the central bank, that is feasible. It is not a disaster, but it has to happen very quickly. I do not believe that short-time working is enough for the workers either. Short-time work, that is 60%, that is also very little. The state should now say that I am giving you 80% or even 100% so that we can get through this short phase with as little friction as possible and then grow again relatively quickly afterwards. Because that will only happen if these people do not go into the rest of the year with fear, so to speak.
It is also said that loans would be made easier for small entrepreneurs and the self-employed, but is that enough, because they have to pay it back somehow?
Yes, I think there are still grand illusions. Someone from the Reconstruction Loan Corporation said you can't blow money out like that. They're wrong. You have to blow it out. It must also go to the little ones, that is absolutely right, and the solo entrepreneurs. The people would have to produce a simple paper showing what they had earned last year, and then the bank would have to say, yes, and on that basis I am giving you this for three months now, so that you can survive. We will see in three months' time, but I will give you this for three months, and I will send it to the Credit Bureau for Reconstruction. They'll tell you that you'll have a guarantee for it without a big check. How are we going to check 5 million companies? That's ridiculous. Otherwise the bureaucrats will sit there and say, now we go through all the forms or what? It'll take five months and then it'll all be over. It has to happen in the next few days and incredibly quickly.
What about unemployment? Economics Minister Altmaier actually sat down and said that Corona will not cost Germany any jobs. I must say I found that absurd.
Yes, it is unbelievable. No, it will cost a lot of jobs. People are already unemployed. They may not be officially registered as unemployed now, but they are sitting at home and have nothing to do, production is up, that is unemployment. What else is unemployment? But you have to make sure that these people get their jobs back. They got into this situation through no fault of their own and therefore the state should compensate them. Like I said, debt limits and all that, that's all nonsense, you can forget it. In a year's time you will find that you have saved for 15 years for nothing, and the debt ratio will, as I said, be much, much higher than it was in Maastricht or anywhere else. That is all bullshit, you have to forget all that right now. If you do not do that, it will end badly. But I still hope that they will understand what it is all about.
What does that mean for the euro? All that printing and pumping money into it?
That is unproblematic, because where is the euro going to go? The other countries are doing the same thing, the USA is talking about 1000 billion being pumped into the economy, and helicopter money - which I think is completely wrong - is now being distributed. Why should people like me, pensioners or civil servants, why should they get money now, it makes absolutely no sense. No, the money must go to those who are now becoming unemployed or going into short-time work, they must get money. But not everyone, that's cheese. But the dimension for the USA is just as great as for Europe and where should the euro fall now? It is the same problem all over the world. Nothing will happen, so I have no reservations about that. What I have great concerns about is that the stock markets are going crazy every day, up and down. I would close them now, I would just close them for a month or two. Because the signals coming from there only create uncertainty among people and companies, among managers. Everywhere it creates insecurity for no reason. With every signal it goes up or down, there's no point, it's completely irrational.
Colleagues of yours from the more neo-liberal corner, they have been predicting such a crash for a long time. They say, as it were, that first comes deflation, then inflation, then the euro will be destroyed, what do you say to that?
That is all nonsense, these crash prophets, none of it has anything to do with this. We have an extraordinary situation here, a health situation that is affecting countries all over the world. It has nothing whatsoever to do with the crash that these people are all predicting, nor does it have anything to do with inflation. We have to get this over and done with dramatic emergency measures, that is quite right, but we also have to explain it to people. As I said, I completely missed that with Mrs Merkel yesterday. She said she wants to explain, she has to explain. She should now stand up and say how she intends to stabilize the economy, because that is clearly the next task, and she did not say a word about it.
There are 750 billion now, you say that's enough to keep Europe [EU] stable. The central banks don't have that much room for maneuver any more, they've already shot their bolt, haven't they?
No, they only have no more leeway when it comes to interest rate cuts, that's where the powder is shot, but of course they can refinance now - if the states go to the limit now, the central bank will have to - I explained that earlier. Well, the printing press is going to get started, let us not fool ourselves, and the central bank will have to refinance it. 750 billion is, as I said, a quite reasonable figure if the crisis lasts two to three months. If it lasts four or five months, it won't be enough, it will be more, that's undoubtedly the case with this dramatic decline in gross domestic product.
When we spoke two weeks ago, we were already talking about a European crisis and a crisis we are in. I have the impression that we are going from crisis to crisis, quite apart from Corona, perhaps we simply need a new system?
We do not necessarily need a new system; we need a little more understanding of the system in which we live. We simply know too little about it, and we have some really wrong hypotheses and theories. In fact, Germany was actually already in a recession. In 2019 there was already a recession, which was not officially measured in this way, but it was clearly one. Europe has been in a difficult situation for much longer. We had the euro crisis and Italy and France are in much worse shape than Germany, even at the beginning of this shock now. I honestly do not want to imagine what would happen in Italy if I were to make a calculation now; it would be terrible for Italy. And the big problem is that we are now getting an additional shock that is hitting all the countries at once, for which we do not have common resources. I also find it very regrettable - if I may say so at this point - that Germany has now introduced unilateral border controls with France. In my view, there is no reason for this, because France is in the same health situation as Germany. This has been a huge shock in France, both symbolically and in European terms, and this 'close the borders, do something' is not a solution to the problem. That is actionism, which in the end only confuses and irritates people. So, we must now fundamentally reflect on how we make economic policy in Europe. It will no longer work with the old rules. The Maastricht Treaty has to go, and the Stability and Growth Pact is obsolete too, and all that can be forgotten. If we get out of this crisis now and the mass of states in Europe have a debt level of 90 or 100 percent of gross domestic product, then that is the way it is. Then you cannot say that you have to save for 20 or 30 years to get back to 60%. That is completely crazy, so if you imagine that, you are destroying Europe one hundred percent. It has already done a tremendous amount of damage. As I said, I don't want to imagine Italy when it comes out of the crisis. Nor do I want to imagine what the mood in Italy will be like when they get out of this crisis and start talking openly about the Germans and about Europe again, which I think will be terrible.
Do we, for example, already have this discussion about what really needs to be changed after this crisis? Does that already exist or is everything at the moment [fixed] on medicine? No, there are no such things yet, only very tentative approaches from my economist colleagues to now admit that something tremendous has happened. Now the president of the Kiel Institute has said that this will be the 'mother of all recessions', but as I said, recession is not the right word for what we are about to experience. We are experiencing a unique shock, a shock greater than anything we have seen before, and we have to prepare ourselves for a new language. This has nothing to do with the economy either, because it is a one-off shock that has to be cushioned by the state, by the central banks, in the hope that it will be over in two or three months and that we will then be able to get life back to normal. It is possible, but we must throw all our old dogmas about debt and the debt brake overboard. Everything must be thrown overboard.
There are people all over the world, not only in Germany, not only in Europe, in America, there are people in Brazil who are afraid that they will not get out of this crisis economically, that they will lose their jobs, that is almost a global story. That's a powder keg, isn't it? So many people who may no longer have a job, who are afraid?
Of course, uncertainty is the worst thing there is. Take Brazil for example, it's been in a deep crisis for two or three years now. Mr Bolsonaro, we don't have to talk about that man, a lunatic in the presidency, he hasn't managed to get himself out of it. This is really explosives. If they fall deep into the ditch now and the state is not in a position to compensate even halfway, then civil wars, riots and I don't know what else could happen everywhere. So the potential danger of this crisis is enormous and it is therefore important that the states understand what their task is now. It is an enormous task that can be solved, but it must now be tackled incredibly quickly and, above all, all bureaucrats must be removed and people who can see clearly what is going on must go to the decisive places.
Do you have this optimism that this will actually happen?
I have a certain optimism that, in an emergency, some people will understand what is happening. I hope that we can perhaps observe this. When Mrs Merkel comes to the people next week and makes a speech on the economic situation and says something like what I have said, then there is hope. But if she puts a brake on debt and says 'we have to do a bit here and a bit there now' and 'lending to businesses takes a lot of time' and 'short-time working is also good' and so on - all such excuses will not get through. It has to be said, in the harshest and most brutal terms, that this crisis, this shock, calls for special measures such as we have never seen before, not only in the health sector, but also in the economic sector.
We are currently experiencing the phenomenon of toilet paper being sold out everywhere, and that is something to think about. Today it is the toilet paper, the day after tomorrow people might run to the bank and get their money out of sheer fear.
As I said, if you do not react reasonably and quickly, if you do not give people the security of knowing that they will keep their money streams, that they will not fall into a very deep hole, then that cannot be ruled out either. I do not want to paint this on the wall. But of course, hoarding toilet paper - that's crazy too. Thank God, it's not so bad in France, I was just in the supermarket, there's still everything there, paper and everything else. It is of course a sign that some people panic in any case and the sensible ones always fall down the back and the sensible ones panic at some point. So it is important to act, it is important that Mrs Merkel stood up in front of the people yesterday - I would have made a different speech - but so be it. She thanked the nurses, but she should have remembered ten years earlier that these people are paid a reasonable wage, that hospitals are sewn on edge and all these things. Funnily enough, she forgot all that, it was all under her reign - so let's forget that, not important now. What is important now is that we act vigorously and immediately.
Does Macron do that better than Merkel?
No, Macron - in France everything is a bit easier because it is centralized. So German federalism - one does a bit here and another a bit there, some will now impose a curfew, others not. That is also cheese, in my eyes. Macron talked about 'war', which I thought was totally exaggerated. That was also not appropriate and he caused hecticness and uncertainty for two or three days at least. But centralism is already helpful here, because it ensures that people act in a uniform manner throughout the country. When you now see how the prime ministers and the mayors and who knows who else are lashing out at each other in Germany. That is a bit alarming, so it is not ideal. If you have already decided to pursue such a strategy, which I think is the right one, because I cannot judge it, because I have no better explanation. You have to rely on the experts, the virologists, there is no way around it, and then you have to take the next step and say, well, now I am economically buffering what I have decided on health.