EconPol Europe: Focus Must Be on Health Policy, as Costs to German Economy Predicted to Reach Up to 729 Billion

A report from EconPol Europe calculates potential costs of coronavirus to the German economy of up to 729 billion, with up to 1.8 million jobs cut and six million workers affected by lower hours.

But the report, which was originally released in German using figures from the ifo Institute, stresses that the aim of any action must be to shorten the partial shutdown of the economy without compromising the fight against the epidemic, with strategies that combine a resumption of production with further containment of the epidemic.

“For political decisions it is particularly relevant to know how expensive it is to extend the shutdown,” says Clemens Fuest, EconPol speaker and co-author of the report. “We see that a single week of extension will cause additional costs of EUR 25 to 57 billion and thus a decline in GDP growth of 0.7 to 1.6 percentage points. Given these costs, it is particularly urgent to develop strategies to make the resumption of economic activity compatible with containing the coronavirus epidemic.

“However, debates that see an insoluble conflict of objectives between economic recovery and the fight against the epidemic lead to a dead end,” he continues. “There is an urgent need to look for ways to combine the gradual lifting or easing of the shutdown with effective health protection. Current developments in other countries, especially in Asia, offer starting points. These include, as epidemiologists repeatedly emphasize, extensive testing, special protection of vulnerable sections of the population, widespread use of breathing masks, disinfection measures in public spaces, and much more.”

This study uses scenario calculations to estimate the economic costs of the partial closure of the economy due to the coronavirus epidemic. With a shutdown duration of two months, the costs reach between EUR 255 billion and EUR 495 billion, depending on the scenario, and reduce the annual growth rate of GDP by between 7.2 and 11.2 percentage points. With a shutdown duration of three months, they reach EUR 354 to 729 billion (10.0 to 20.6 percentage points growth loss).

“The massive shock that hits the labor market is overshadowing the conditions at the height of the financial crisis,” continues Prof Fuest. “In the scenarios we are looking at, and without taking into account the extensive planned guarantees, loans and possible European rescue packages, public budgets would be burdened by up to EUR 200 billion. From the point of view of macroeconomic stabilization, the underlying loss of tax revenues and additional expenditure, especially for transfers, are both desirable and necessary.”

Professor Fuest and the co-authors of the report urgently recommend the use of “practically every conceivable amount in the area of health policy measures that shorten the duration of the shutdown without impairing the necessary fight against the epidemic.”

Read the full report (English version): https://www.econpol.eu/publications/policy_brief_21