Merkel’s crisis stimulus is seeping into German economy

Bloomberg

In late March, Arnold Mergell delivered an urgent message to Germany’s political elite. Standing in front of a row of blue metal barrels, he complained that the funds needed by small and mid-sized companies like his to survive the coronavirus crisis weren’t getting through fast enough.
“The bazooka’s been loaded, but the trigger is stuck,” said Mergell, who runs chemicals company Hobum Oleochemicals GmbH in Hamburg, with 52 employees.
Two weeks later, Mergell returned to YouTube with a decidedly more upbeat message. Now, he exclaimed, the funds were flowing freely. That’s after Economy Minister Peter Altmaier unveiled a program on April 6 aimed at fast-tracking loans to Germany’s Mittelstand, the backbone of Europe’s largest economy, with unlimited guarantees covering 100% of their credit risk.
The swift turnaround, defying the country’s reputation for red tape, underscores the hands-on approach German officials are taking to protect growth as the virus shutters shops and factories globally. Chancellor Angela Merkel’s government has pledged aid worth more than 1 trillion euros ($1.1 trillion) in state guarantees, loans and direct capital to companies, and also eased access to state wage support for workers.
Businesses elsewhere, meanwhile, are less impressed. Just 1% of companies in a UK survey reported successful applications for emergency loans, and Italian executives complain of slow disbursements and bureaucracy. In the US, the government’s Paycheck Protection Program, which aims to issue loans meant to help small businesses, has been beset by confusion and delays since its roll-out.
“It seems surprising how quickly the German government is responding, but at the same time it’s completely in line with what it has professed for years about maintaining fiscal prudence in good times in order to spend when it’s needed,” said Christian Odendahl, chief economist for the London-based Center for European Reform.
The emergency is real. Germany’s economy will shrink almost 10% in the second quarter, more than twice the pace it suffered at the height of the financial crisis, according to the country’s leading research institutes.
In one sign of the speed of mobilisation, authorities in Berlin, whose unfinished airport long made it a target of jokes, paid out 1.3 billion euros to freelance workers and small companies, processing 140,000 applications in just a few days. The money arrived in some businesses’ bank accounts within 24 hours.
The country has had generous crisis-response measures available for years, and their relatively smooth implementation might stem from previous experience. State wage support for workers, for instance, saved hundreds of thousands of jobs during the global financial crisis. While the UK is experimenting with paid furlough schemes for the first time, the Germans are fine-tuning a program in
existence since the 1950s.
“One advantage Germany has is its model of preserving businesses and jobs during a recession, allowing it to more easily scale up existing instruments,” said Odendahl.
Liquidity support from the country’s state bank, KfW, also existed before and is being expanded. A spokeswoman said loans worth several billions of euros have already been approved, and applications for up to 3 million euros can be processed instantly.
Ana Botin, who heads Spain’s largest lender as chairman of Banco Santander SA, said in a series of Twitter posts on Tuesday that Germany’s loan program should become the “benchmark” for the rest of Europe.
Not everything is going to plan. Banks struggled initially, and it remains to be seen how quickly government wage support — which firms pay upfront to be reimbursed later — will reach their bank accounts.
Several Mittelstand executives have warned that Germany is also too slow to prepare for a way out of the crisis. They want a horizon for businesses to plan for restarting machines.
Mergell, whose great-grandfather founded Hobum in 1896, said an exit plan is “really important.” His company makes vegetable oil-based products used in anything from mattresses to car laquer.
“We are entrepreneurs who want to invest,” he said in an interview. “It’s in our DNA, but we need to know that it makes sense.”
Germany’s aid programs aren’t a panacea either. Some smaller companies may struggle to repay loans lasting years, and a survey in late March by the Association of German Chambers of Industry and Commerce showed one in five SMEs saw a risk of insolvency. More than two thirds said aid in the form of cash injections is most effective and should be expanded.
For some businesses, it’s already too late. Appelrath Cuepper GmbH, a fashion retailer founded in 1882 that employs about 1,000 people, filed for insolvency under self administration on April 7 after being denied a KfW loan. It will restructure and try to resume operations when the crisis passes.
Still, for Zack Helwa, a gallery and print-business owner in Berlin, the stimulus is working. He received 8,000 euros in aid from the government to support his business and replace lost income as a freelancer.
“The unexpected thing was how unbureaucratic it was,” he said. “The application form took me 10 minutes to fill out, and two days later I had money.”