Why the Wirecard scandal could become a complicated affair for the Berlin government

The federal government's support for Wirecard to enter China and contacts between the Bavarian company and lobbyists close to the secret service put pressure on government circles in Berlin. What did the Ministry of Finance and the Berlin Chancellery know about the real situation of the company? The well-informed German Foreign Policy reconstructs the Wirecard affair and the responsibilities of Berlin's political circles.

Talks with the Secretary of State

After the outbreak of the "Wirecard case" the German Ministry of Finance ended up at the centre of public debate. The Ministry is responsible for monitoring the Federal Financial Supervisory Authority (BaFin), which in early 2019, after a detailed investigation of Wirecard's irregularities by the Financial Times, reacted by even helping the Bavarian company with a ban on "short selling" the share and at the same time lodging a complaint against the investigating journalist and also subjecting the company to a simple inspection by the Deutsche Prüfstelle für Rechnungslegung (DPR), which was not expected to lead to any results [1]. The Board of Directors of BaFin is headed by Jörg Kukies, Secretary of State at the Ministry of Finance. As Kukies recently confirmed to the Chairmen of the Bundestag Finance Committee, he has been keeping Minister of Finance Olaf Scholz updated on developments in the Wirecard case since early 2019. He also had at least two talks with Wirecard CEO Markus Braun, one on 4 September, and one on 5 or 15 November 2019. The Ministry kept the content of the talks secret; it is also said that no minutes were taken after the November meeting [2]. This circumstance is even more controversial since BaFin, under its Chairman of the Board of Directors, Kukies, even for formal reasons alone, should have continued to keep Wirecard under observation.

The entry into the Chinese market

That November 5, 2019 Wirecard had a strategically important success: its entry into the Chinese market. As announced by the Bavarian company, in fact, just that day, an agreement had been reached for the acquisition of the Chinese payment processor AllScore Payment Services, initially at 80%; the remaining 20% would be acquired two years later. The full acquisition was only possible after Beijing, during a visit by Finance Minister Scholz in January 2019, confirmed that as part of the initiative for the "German-Chinese Financial Dialogue" it would welcome German companies "into the Chinese payment services market" - a step towards further opening up China to foreign investment, as repeatedly requested not only by the German government. [3] It is even more noteworthy that the German side has started to deepen economic cooperation through a company whose activities are now considered one of the most serious cases of fraud in the history of the German economy and which, moreover, has taken over a Chinese company already targeted by the Chinese authorities because of numerous illegal transactions, in particular because of the handling of gambling payments, which is prohibited in China. As a result, AllScore Payment Services was condemned in April to pay the biggest fine ever imposed in the sector to date, amounting to USD 9.3 million [4].4 Why the Wirecard scandal could become a complicated affair for the Berlin government

Accompanied by the Chancellery

On the German side, the agreement had been concretely prepared not only by the Ministry of Finance, but also by the Berlin Chancellery Office (Kanzleramt) - on the initiative of a former Federal Minister, now active as a lobbyist: Karl-Theodor zu Guttenberg, who had already served as Federal Minister of Economic Affairs in 2009, and from 2009 to 2011 as Federal Minister of Defence, and who is currently head of the consulting firm Spitzberg Partners in New York, which he founded. According to press reports, Guttenberg's colleague at "Spitzberg Partners", Urs Gatzke, who was responsible for the Washington office of the Hanns-Seidel-Foundation (CSU) from 2004 to 2013, had asked the Ministry of Finance by telephone and e-mail to inform the responsible government offices in Beijing of Wirecard's interest in entering the Chinese market. The request, it is said, was granted in June 2019 by Secretary of State Wolfgang Schmidt, Scholz's "closest confidant". [5] On 3 September 2019, just before a trip by the German Chancellor to the People's Republic, Guttenberg had discussed it personally with Angela Merkel. Subsequently, he informed Merkel's closest economic advisor, Lars-Hendrik Röller, by e-mail about the planned entry of Wirecard into the Chinese market and asked for "accompanying measures" [6]. In the meantime, the Federal Government admitted: 'the Chancellor raised the issue of the acquisition of AllScore by Wirecard during her trip to China'. On 8 September, after the Chancellor's return, Röller had written in an e-mail to Guttenberg, according to a government spokesman, that "the matter" had been "raised during the visit to China" and "further accompanying measures" had been taken [7].

Evidently informed

The Chancellery was evidently aware of the serious accusations made against Wirecard, accusations that had already led to investigations by a public prosecutor's office, not in Germany, but in Singapore; and Singapore is one of the countries where Wirecard had freely chosen to park its billionaire balances on credit, completely invented balances. On August 13, the Chancellery had also received a request from its former official Klaus-Dieter Fritsche, in which he - like Guttenberg, active as Wirecard's lobbyist - asked for an appointment to discuss the company in Aschheim. The Chancellery had then requested more detailed information about Wirecard from the Ministry of Finance, which he received by e-mail on 23 August [8]. In this e-mail, the Ministry of Finance also referred to 'already publicly known allegations against the company', confirms a government spokesman. The documents received by the Chancellery as an attachment to the e-mail of 23 August referred, among other things, to 'allegations of money laundering and market manipulation' - which, however, were not an obstacle for Röller and Merkel in paving the way for Wirecard to enter China.

Secret Service contacts

There are many questions still open about Fritsche's role in the affair. From 1996 to 2005, he was vice-president of the Federal Office for the Protection of the Constitution (Bundesamts für Verfassungsschutz, BfV), before becoming secret service coordinator at the Chancellery at the end of 2005; at the end of 2009 he then moved on to the Ministry of the Interior as state secretary, before returning to the Chancellery at the beginning of 2014 - now as commissioner for the federal secret services. He held this post until his retirement in March 2018. It is also said that Jan Marsalek, the alleged mastermind behind the Wirecard fraud, had intensive contacts with the secret service. In this regard, Stephan Thomae, Vice-Chairman of the FDP parliamentary group in the Bundestag and member of the Parliamentary Control Committee (PKG), responsible for the secret services, asks that "in this context" the "role" played by Fritz in the case also be "discussed". [9] Thomae calls for a special meeting of the PKG to that end.

FPÖ and the defence of the constitution

It is known that Fritsche was hired by the Austrian Ministry of the Interior at the beginning of 2019 under the leadership of the then Minister Herbert Kickl (FPÖ) as an advisor to carry out the "development" of the Austrian Office for the Defence of the Constitution [10]. At the same time, Marsalek reportedly not only knew the former party leader Heinz-Christian Strache, but also met his then intimate Johann Gudenus several times and had close contacts with the FPÖ. During Kickls' tenure at the Austrian Ministry of the Interior, Marsalek had also promoted a project; press research identified him as a liaison man who intercepted information from the Austrian Office for the Protection of the Constitution and passed it on to the FPÖ.[11] It has not yet been clarified, however, whether Marsalek also had contacts with Fritsche.

[1] S. dazu Der Fall Wirecard.

[2] Tim Bartz, Anne Seith, Gerald Traufetter: Finanzministerium sprach mit Wirecard-Chef über brisante Sonderprüfung. spiegel.de 15.07.2020.

[3] Joint Statement of the 2nd China-Germany High Level Financial Dialogue. Beijing, 18.01.2019.

[4] Zhang Yuzhe, Guo Yingzhe: Central Bank Imposes Another Record Penalty on Payment Provider. caixinglobal.com 08.05.2020.

[5] Der Mann, der vieles wusste. spiegel.de 24.07.2020.

[6] Eckart Lohse: In die Offensive. Frankfurter Allgemeine Zeitung 23.07.2020.

[7] Sven Becker, Rafael Buschmann, Nicola Naber, Gerald Traufetter, Christoph Winterbach, Michael Wulzinger: Kanzleramt setzte sich für Wirecard ein. spiegel.de 17.07.2020.

[8] Eckart Lohse: In die Offensive. Frankfurter Allgemeine Zeitung 23.07.2020.

[9] FDP beantragt Sondersitzung des Geheimdienstausschusses. spiegel.de 24.07.2020.

[10] Stefan Buchen: Rechtsabbieger: Der neue Job von Merkels Geheimdienstmann. daserste.ndr.de 07.03.2019.

[11] Anna Thalhammer: Flüchtiger Wirecard-Manager war geheimer FPÖ-Informant. diepresse.com 09.07.2020.

Marcel Fratzscher - The real reason for the deep social inequality in Germany

The great German economist Marcel Fratzscher, director of the prestigious DIW in Berlin, on Die Zeit explains why social inequality in Germany is so extreme. From Die Zeit

The distribution of private assets in Germany is much more uneven than in other countries. In the previous commentary I spoke about some recent data which show us that in Germany the real wealth of millionaires is much higher than previously thought and that consequently the overall inequality in the distribution of assets is also much higher than previously assumed. What makes the distribution of wealth so unusual in Germany is the fact that very many people have little or no savings, or even find themselves in a situation of net debt. And for this reason they must necessarily rely on the welfare state. They have relatively little personal responsibility and little room for manoeuvre for themselves and their families - especially now, in the crisis caused by the coronavirus. But is this high inequality in terms of assets a problem? And for whom? To answer, we need to know more about the distribution and nature of this wealth.

There are just under a million millionaires in Germany, which is about 1.5% of all adults in the country. At the other end, there are around 16 million citizens who have no net savings or are even in debt. Is that fair? Many studies show that we Germans associate social justice primarily with achievements and adequate satisfaction of needs. By contrast, the vast majority of Germans would not consider a uniform distribution of assets or income to be fair. This means that many would consider a high level of wealth to be fair, if this is essentially due to the performance and merit of the individual.

A new study by the Berlin DIW shows that millionaires in Germany have six common basic characteristics: they are unusually often male, middle-aged or older, have no migration background, come from West Germany, are well educated and often work on their own. Three of these characteristics are very compatible with the principle of merit: if people strive to achieve a good level of education and training and run the risk of starting their own business (most of those who try then fail, often more than once), then the assets will be the result of individual performance. Moreover, the fact that people can only accumulate a fortune in middle age or old age would seem logical and in itself not unfair.

There are 3 other characteristics that are problematic. Because there is absolutely no good reason why gender, geographical origin or migration background per se - if you leave out all other relevant influencing factors such as education - should influence wealth or income. There are many scientific studies showing that these three characteristics also play a decisive role in the labour market. But the most important reason for the great wealth differences in Germany is another: inherited wealth.

Inheritances in contradiction to the principle of merit

More than half of all private wealth in Germany today has not been earned or created with one's own hands, but is the result of inheritance and donations. And this contradicts the principle of merit (and of course the principle of necessity). In fact, only a little more than one person in three inherits a fortune.

It is mainly millionaires who have inherited a large part of their assets, usually in the form of corporate and real estate. Two-thirds of inheritances from companies transferred tax-free go to male heirs, only one-third to female heirs. 41 % of the millionaires' assets are real estate, 43 % are business assets. On the contrary, people with few assets usually do not own a house, have few savings on their account and perhaps not even a car. Adults in the lower half of the wealth distribution in Germany have on average a net wealth of around 3,600 euros.

For many, an inheritance is a great fortune. It means security, it opens up new professional opportunities or the possibility of continuing old family traditions. Especially for younger families in big cities, an inheritance is sometimes the only chance to afford a good apartment in a good location. It is therefore not surprising that surveys clearly show that many Germans are against an increase in inheritance tax.

However, two fundamental problems arise here. On the one hand, large inheritances pay significantly less inheritance tax than relatively smaller ones. In the case of inheritance, moreover, business assets are mostly not taxed. This also explains why, before the inheritance tax reform, Germans with more than €20 million in inheritance paid less than 2% inheritance tax, while people with an inheritance of up to €500,000 paid more than 10%.

Inheritance tax reform may have reduced this problem somewhat, but it is far from being solved. Sooner or later the issue of inheritance tax will become the bone of contention in the German political debate. A radical simplification of inheritance tax, for example a 10% tax on all assets, after the necessary exemptions, and without exception, would be a wise solution that would probably be perceived by society as fair.

The second fundamental problem is that many people with low incomes, little education and few opportunities are not fortunate enough to be able to collect an inheritance, but are completely dependent on the social security system of the state. The welfare state, however, is an insurance policy that protects people from risks such as illness or unemployment, not a tool for people's development.

The central problem: the lack of equal opportunities

If inheritances are so important, then why shouldn't all people be lucky enough to receive an inheritance? The idea of an inheritance as an opportunity for life, which I picked up on some time ago in this column, would give every young person an inheritance of EUR 30,000 on completion of their education. This money could then be used freely by anyone, for example for a career change, a period of leave from work to take care of relatives or other socially important tasks.

The lack of social justice perceived by many people in Germany is not so much about the fact that so few people own so many assets, but that many have so little. The central problem is and remains that there are no equal opportunities: during their working life, many people do not even have the opportunity to build up a small fortune and to plan their lives beyond the help of the welfare state. Yet money and independence, as I will show in my next commentary, undoubtedly make people happier.

Clemens Fuest - 6 possible scenarios for the Italian public debt

Is it possible to secure the Italian public debt? Clemens Fuest, director of the prestigious Ifo Institut in Munich, answers. On Focus he tries to analyze 6 possible solutions for the long-standing problem of Italian public debt. Clemens Fuest from Focus.de 

The causes of Italy's high public debt are many, and all show a rather weak link with a frivolous budgetary policy.

There are several possible options to solve the problem of Italy's public debt, ranging from debt reduction, to asset tax, to exit from monetary union. But they all have disadvantages.

That is why it is likely that there will be strong tensions within the eurozone in the coming years.

The European debate on the economic situation, both in the crisis caused by the coronavirus and after the Eurocrisis, has always focused on the level reached by national public debts, public debt spreads and the consequences of a fall in government bond prices for Italian banks, which hold a significant share of these bonds.

Often in this debate, one gets the impression that Italy has found itself in financial difficulties only because of a rather frivolous debt policy. In reality, Italy's public debt is more a symptom of the country's economic difficulties than its cause. Where the real Italian problems lie becomes immediately clear if you take a look at the trend of Italian economic growth over the last four decades.

Italy is still suffering from the financial crisis.

The figure compares the trend of economic growth in France, Germany, Italy and the United Kingdom since 1980. Until the mid-1990s the economic development of these four countries was quite similar. After that, things changed radically.

In Germany, the pace of growth has slowed down in the meantime. The country had to bear the burden of reunification. Germany also entered the European Monetary Union with an overvalued currency. In Italy, however, growth continued to slow down in subsequent years. Until about 2005, Italian economic output followed roughly that of Germany. But then after the collapse due to the global financial crisis, Italy never recovered. While all the other countries considered here in the last ten years have returned to growth, the Italian economy has stagnated.

The reasons for this chronic weak growth have been discussed at length. The factors mentioned are manifold:

- The reforms of the education system in the 1970s and 1980s are often cited as a possible cause of low productivity.

- The emigration of talent has also weighed on growth.

- The judicial system works so slowly that contracts are often not applicable.

- China's entry into world markets since the 1990s has put Italian products under greater competitive pressure than those of other economies.

- The inefficient decision-making processes of family businesses are responsible for the fact that many of them have been unable to react to structural change. Moreover, the regulation of the labour market makes it difficult for companies to grow beyond a certain size.

- Some blame Italy's entry into the euro. It would have prevented Italy from devaluing its currency on a regular basis, as was previously the case.

- Still others point out the lack of reforms in economic policy during Silvio Berlusconi's governments.

- The fiscal policy implemented after the euro crisis, in particular the rapid return to a restrictive fiscal policy driven by financial market pressures and lack of public investment, would have hampered the economic recovery.

- Shortly before the crisis caused by the coronavirus, the conflict between the Five Star Coalition Government - Northern League and the European Commission about the budget deficit has put investors and consumers in crisis and weighed on economic development.

All these factors, presumably, have contributed to Italy's poor growth. It is a mixture of unfortunate circumstances and omissions on the part of political and economic decision-makers. Italy is entering the crisis caused by the coronavirus with a further growth in public debt compared to the level reached during the last economic crisis. The basic question is whether the country will be able to overcome the crisis by maintaining economic and financial stability in the coming months and years.

Six scenarios appear possible with regard to the development of Italian public finances:

1 - Stabilization of public debt at a high level with a slow reduction of the public debt/GDP ratio

It is theoretically possible that Italian fiscal policy could increase public spending during this crisis in order to stabilize the country's economy, while at the same time bearing the drop in tax revenue caused by the crisis. According to current forecasts, this would bring the public debt ratio to around 155 % of GDP. As long as interest rates on Italy's public debt remain low and creditors are willing to refinance the maturing public debt, the country will be able to live with high levels of public debt. In order to reduce this debt ratio significantly before the next crisis, economic growth in Italy will have to increase significantly. For the debt ratio to reach the level recorded before the coronavirus crisis by 2030, economic growth will have to be two percentage points higher than in recent years, with realistic primary surpluses. This would be a very optimistic scenario. This can only be achieved if the country implements far-reaching structural reforms and prioritises investment over consumer spending in its fiscal policy.

2 - Debt cut-off

It would be risky, but still conceivable, to reduce the Italian public debt by restructuring it. In order to assess the consequences of such a debt restructuring it would be important to understand who are the creditors of the Italian State. Italian households have a high level of savings. Italy is considered to be a country whose public debt is mainly held by its citizens. On closer inspection, however, this is only partly true. The structure of the Italian State's creditors in 2019 was analysed by Gros (2019).

In 2019 Italy's total public debt amounted to approximately €2,250 billion. Italian banks are by far the largest creditors. They have granted direct loans to the Italian government for EUR 290 billion and also hold Italian government bonds for a further EUR 400 billion. Italian households directly hold EUR 100 billion worth of government bonds. There are also investment funds and insurance companies with a predominantly Italian clientele. Foreign banks hold 450 billion euros in Italian government bonds. The Bank of Italy holds another 400 billion euro in securities, mainly as part of the ECB's securities purchase programmes. These bond holdings will continue to grow even during the post-Corona crisis. In principle, the Bank of Italy would be liable for defaults on these bonds. However, purchases of Italian government bonds by the Italian Central Bank generate liabilities to the rest of the Eurosystem within the so-called Target balances. It can therefore be assumed that the risks of this stock of bonds are ultimately borne by the foreign creditors. While a zero interest rate is currently applied to the Target liabilities, the proceeds from the assumption of this risk therefore remain in Italy.

In the event of a debt cut of, say, 50 %, most Italian commercial banks would have to be recapitalised, as losses of EUR 345 billion would occur. And this could only be done by drawing on a substantial part of Italian citizens' deposits and savings. It remains to be seen to what extent this could be compatible with European legislation on deposit insurance. Because of the losses on government bonds, investment fund shares and insurance directly held, there would be a further €350 billion of losses for Italian households. It is difficult to imagine that any Italian government would be willing to put savers in such a situation. Its re-election would undoubtedly be impossible.

It would also be difficult to persuade the European partners to cancel half of the Target loans to the Bank of Italy. It also seems difficult to expect foreign banks to incur losses of EUR 225 billion.

3 - A one-off wealth tax on Italians

Italy is often asked to reduce its public debt by applying a one-off tax on assets. In January 2014, the Bundesbank had already presented the concept of a one-off wealth tax as a means of avoiding the bankruptcy of the Italian state. The disadvantages and risks associated with wealth taxes, in particular the risk of capital flight, normally play against wealth taxes. However, situations are conceivable in which, in the absence of better alternatives, using this instrument might make sense: "In the exceptional situation of imminent State insolvency, however, a one-off levy on assets might have more favourable effects than the other options still possible".

However, such an asset tax would raise many problems. If it included movable assets, for example, it would lead to a capital flight. This would exacerbate the Italian economic crisis even further. Since large assets are often linked to companies, the tax would end up burdening companies that would have to invest and create jobs. To avoid capital flight, the tax could be limited to real estate. In that case, however, it would have to be proportionately higher. From the point of view of fair burden-sharing, however, it would be difficult to negotiate a cancellation of public debt exclusively at the expense of property owners.

4 - Shift the debt to other member states

It would theoretically be possible for the other member countries of the eurozone to relieve Italy of part of its public debt. The citizens of the other eurozone states, however, would never accept a direct redistribution of debt. It would therefore be conceivable for the other Member States to grant very long-term loans at interest rates close to zero, similar to those granted to Greece, for example, through the ESM. As long as these loans can be refinanced at an interest rate close to zero, there would be no problem. Creditor countries, however, may feel that there is no room for manoeuvre to borrow more, at the latest during the next economic crisis.

A generally used argument against shifting Italian public debt to other European countries is that Italian households often have relatively high levels of wealth. The graph shows that, although average net wealth is slightly lower than the eurozone average, it exceeds the wealth of Dutch and Finnish households, for example. It is difficult to imagine that in a country where households have lower average private wealth, they are then willing to ease the burden of the public debt of a country whose citizens are on average richer.

5 - Debt relief through the ECB

From time to time some people suggest that the problem of Italy's public debt should be solved by the central bank, which should buy most of the bonds and refinance the country. There are even calls for the central bank to waive interest payments and cancel the bonds. The proposal to eliminate public debt through the definitive transfer of government bonds to the central bank is as convincing as the famous lies of the Baron of MÃŒnchhausen. It is forgotten that the central bank's profits are still due to the state. If the Italian central bank, with the approval of the ECB, were to buy government bonds and issue them in exchange for money, this would create a central bank profit that would have to be transferred to the Italian government. If the central bank were to buy more government bonds, there would be less room, for example, to buy corporate bonds, given the total money supply. The interest income on these corporate bonds will consequently be lower. The plan to forget the public debt in the basements of central banks only works if you believe you can expand the money supply at will. But this is not possible. Anyone who tries to do so will cause monetary devaluation and inflation.

6 - The exit from the euro and the reintroduction of the national currency

The coalition government between the Five Stars and Lega Nord at the beginning of its mandate was openly discussing a possible exit of Italy from the Eurozone. This was accompanied by the idea that in this way Italy could get rid of much of its public debt by switching to a new national currency. The practical consequences of such a changeover - political and economic destabilization of the country and unpredictable legal disputes - however, make this option very unattractive. This is true for Italy and for the rest of Europe.

There is no simple solution

This brief discussion on possible scenarios for the future development of Italy and Italian public finance shows that there are no easy solutions to the problem of the country's high public debt. It is very likely that Italy will be financially supported by the Eurozone countries in order to guarantee the country access to capital markets at a low interest rate. The high level of public debt and the consequences of the post-Crown crisis for the private sector will put a strain on economic development, making it difficult for the country to emerge from a situation of excess debt. In the next economic crisis, over-indebtedness will be difficult to avoid.

The underlying political problem is that there will always be a strong temptation on the part of the governments in office to present over-indebtedness problems as merely temporary liquidity problems, postponing their solution by granting aid loans. The consequences will then be addressed by subsequent governments.

All this shows that considerable tensions will have to be expected in the euro area in the coming years. Italy is not the only country facing financial challenges. Much will also depend on whether Europe as a whole succeeds in relaunching its economic downturn as soon as possible. Whether this can be achieved depends primarily on developments in the pandemic and the government measures taken to contain it. The question also arises for European policy makers as to whether joint action at European level is possible to promote and relaunch economic recovery.e 

The country of inequality

According to recent research by the prestigious DIW (Deutsches Institut für Wirtschaftsforschung) in Berlin, both social inequality and the size of private assets have so far been largely underestimated. According to the DIW, the richest 10% of the population in Germany has 67% of private wealth, while the poorest 50% of the population has only 1% of private wealth. The director of the DIW, Marcel Fratzscher, writes about it in Die Zeit.

Until now, it was not known exactly how rich or poor we Germans really were. The German state did not collect public statistics on the wealth of its citizens - and since wealthy Germans rarely took part in representative surveys, it was also impossible to know what private wealth was actually available in Germany. However, a new and more specific survey by the Deutsches Institut für Wirtschaftsforschung, conducted among the millionaires in this country, is changing the situation: the study shows that the wealth of the wealthiest Germans so far has been grossly underestimated.

In Germany, for example, the total wealth available to citizens is not 8.2 trillion euros, as previously assumed, but more than 10.3 trillion euros. The difference of about EUR 2.1 trillion is equivalent to about two thirds of Germany's annual GDP.

Not surprisingly, people with very high net worth are also reluctant to be interviewed about their wealth, especially since in Germany being rich is usually seen as something negative. The rich are therefore very reluctant to reveal their actual wealth. And they are even less inclined to take part in surveys on the subject. Because of this, our usually very representative socio-economic household survey, i.e. the socio-economic panel of the DIW in Berlin - for which almost 30,000 people in over 20,000 households have been interviewed every year since 1984 - has always had the disadvantage of being able to identify too few people with high net worth and thus to detect their wealth.

My colleagues Carsten Schroeder, Charlotte Bartels, Markus Grabka, Johannes Keunig and Konstantin Goebler have managed to correct this situation. Using a database containing information on the ownership structures of companies, they identified people living in Germany who hold significant shares in at least one company worldwide and asked them if they could interview them. Not all persons with a high level of ownership agreed to be interviewed. But they were large enough to have a representative picture of private wealth in Germany for the first time. In fact, the new dataset also includes 700 Germans with a wealth of over 250 million euros, according to Manager Magazin's list of wealthy people.

Two-thirds of the wealth apartien to 10% richest

The results are very interesting: total private equity - consisting of real estate, financial assets, life insurance, corporate assets and consumer durables such as cars, after deduction of liabilities - is not only at least a quarter higher than was known until now, but is also much more unevenly distributed: the richest 10 % does not own 59 % of total equity, as previously assumed, but holds 67 %. Above all, the top 1% of the distribution is considerably richer than previously thought: instead of the previous estimate of just under 22%, these few individuals, with just over 35%, own more than a third of the total private equity.

In comparison, the poorest 50 % of the population owns only about 1 % of private equity. Expressed in concrete numbers, this means that an average millionaire has an average net worth of around €3 million. Conversely, an average citizen in the lower half of the distribution has an average net worth of €3,682. More than one person in four has practically no net assets or is even in debt.

In an international comparison, the inequality in the distribution of private assets is therefore unusually high. In Europe, Germany is one of the countries with the most unequal asset distribution. The Gini coefficient, a measure commonly used to measure inequality in wealth distribution (a value of zero means a uniform distribution of wealth, a value of 1 a maximum inequality), with the additional data reaches 0.83, and is even higher than it was before (0.78).

Is this right?

Now there will be a heated debate about whether this inequality is right or wrong, economically advantageous or harmful, socially balanced or socially unbalanced - and this will be the focus of the next comment. What is worrying, however, is that so many people in Germany have so few assets and are therefore exposed to great risks, especially in the current coronavirus crisis. Already today, many people with low incomes and low assets have had to draw on a significant proportion of their savings. People on low incomes and with few savings have been particularly affected by the crisis. Their proportion among the almost ten million men and women who have lost their jobs or had to work short hours is disproportionately high.

It should therefore come as no surprise to us that many people are not spending the children's bonus (Kinderbonus) but prefer to save, and choose not to consume despite possible savings from reduced VAT. For people with very high wealth and income, however, these additional transfers from the state make no difference to their consumption behaviour, as they could have financed them even without the transfers. This shows once again that high inequality in terms of income and wealth is a further obstacle to economic recovery, especially in times of crisis like these.

Mainstream media remain silent while the Bundestag approves the Europeanisation of the German redundancy fund

"If the Italians, who are on average richer, allow themselves a poor state, it is perfectly legitimate and it is their right, but they are not entitled to receive benefits that they have not financed. And the Germans, who are poorer, and can afford a richer state, are not obliged to pay twice", writes the great German intellectual and publicist Klaus-Rüdiger Mai in reference to the recent approval by the Bundestag of the law for the financing of the SURE, the plan for a European integration fund. For Klaus-Rüdiger Mai the silence of the mainstream media on the subject is very serious and is a sign of complicity. Klaus-Ruediger Mai from Tichys Einblick.

Although little has so far been said in the media, between Wednesday and Thursday the way was paved for the Europeanisation of the German unemployment insurance system. The crisis caused by the Coronavirus will be used as a pretext to deprive German taxpayers and workers covered by social insurance of their rights, to remove powers from the Bundestag and to overcome the final obstacles to funding states along the road to pooling debts.

Already approved by the Bundesrat, Wednesday in the Bundestag there was the first reading of the SURE Guarantee Act, after which the draft will pass to the committees. However, we do not expect a more in-depth and responsible discussion by the members of the committees, as the second and third readings and the passing of the bill have already been scheduled for Friday. In line with the major transformation announced by Angela Merkel at the World Economic Forum in Davos, this law represents a massive entry into the sphere of the fundamental rights of workers, their social security and that of their families.

The SURE guarantee law allows the EU to borrow up to EUR 100 billion on the financial markets to pay the redundancy fund in the different Member States. These funds will have to be distributed to certain EU Member States in the form of loans. The law does not specify the conditions under which these "loans" will be "granted", but stipulates that an EU guarantee of €25 billion is required for the issuance of the debt. A quarter of the guarantees will come from Germany for a value of around EUR 6.4 billion.

"This Act authorises the Federal Government to issue the relevant guarantee". Fully in Merkel's style, point C reads: "Alternatives: None". In addition, the law does not contain any regulations in the case of a very likely default in the repayment of the loans, the conditions of which are not even mentioned; finally, the German Government considers that 'the use by the Federal Republic of Germany of the guarantees issued is unlikely'. If the Federal Government had wanted to fulfil its obligation to avoid harm to citizens, it would at least have made an effort to take into account the level of the national debt of the States benefiting from the 'loans' which will be financed to a considerable extent by the Germans. Imagine a banker granting a loan to an already heavily indebted customer, which then goes on to burden the account of another customer, who instead has a better credit rating because the customer has been more thrifty.

In the text of the approved law, the government argues that no new financial commitments will be introduced for citizens, that there will be no additional costs to the economy, including small and medium-sized enterprises, and that no effect on price levels should be expected. The government of good weather, in any case, does not expect bad news.

It is not a good sign for the state of democracy if politicians do not even notice the euphemism "the finances of the European Union". After all, the debt is mainly financed by the taxpayers of the European Union countries who pay taxes. But what can you ever expect if even a leader of the SPD with his parliamentary allowance thinks he is supporting small and medium-sized enterprises, as if it is not the small and medium-sized enterprises that pay most of the taxes thanks to which Saskia Esken can live so comfortably.

The question then arises as to why the redundancy fund should be financed by the EU, since the allowance itself is not linked to the economic performance of the state and has nothing to do with the crisis caused by the Coronavirus. The unemployment benefit is an insurance benefit created to prevent unemployment in economic crises and to help workers and employers overcome the crisis.

In Germany, the Kurzarbeitergeld was introduced on 1 January 1957 by Article II of the Law amending and supplementing the Employment and Unemployment Insurance Act of 23 December 1956. Paragraph 130 states clearly there: 'The unemployment benefit is granted to employees subject to compulsory insurance through the social security funds for unemployment insurance in the private sector'. The German short-time working allowance is therefore not paid from the EU budget, nor from EU loans, nor from German tax revenue, but is part of the German unemployment insurance scheme, in which German employees and employers pay their contributions and is one of the largest social security contributions. If Italians, who are on average richer, allow themselves a poorer state, it is perfectly legitimate and it is their right, but they are not entitled to receive benefits that they have not financed. And the Germans, who are poorer, and can afford a richer state, are not obliged to pay twice. Italy, then, already has something similar to the instrument of the German Kurzarbeitergeld (unemployment insurance fund).

The law on guarantees for the European fund SURE will introduce a European allowance for part-time work based not on the principle of insurance, but on credit: loans that are basically already guaranteed by those who pay taxes and social security contributions that are already too high in themselves, and to whom the policy of zero interest rates aimed at financing the states, is in fact devaluing savings.

The introduction of the European unemployment benefit will act as a bridge to the launch of a European unemployment insurance scheme, which will eventually Europeanise the German unemployment insurance scheme. The level of German unemployment insurance benefits will therefore fall, despite the increase in contributions paid. The objective remains, however, to introduce a European unemployment insurance scheme, as the situation is currently favourable in order to deceive German citizens, by means of rapid legislation, who no longer even want to call it a procedure, on the pretext of solidarity and the crisis caused by the Coronavirus. The government can finally count on the complicity of a large part of the media to keep quiet about these and other projects.

The states that will be generously encouraged with these loans will also not even be obliged to spend the money exclusively on lay-off funds, but will be able to use it for "comparable measures and support measures for the health sector, especially for the protection of health in the workplace". And because, as we all know, it is all connected, there will be no limit to the imagination when it comes to how this EUR 100 billion can be spent. If you then consider that Ursula von der Leyen is already talking about spending billions of euros, you get the impression that Brussels has lost touch with reality and probably also lost track of what is happening. There are already EUR 750 billion on the table for some kind of bond, an increase in the EU budget, which will increase the German contribution by another paltry 43%, and here we have a loan to finance a European integration fund.

The only thing that is certain is that a new big party has already started and the financial industry is already in the mood to celebrate - because German taxpayers' money is already certain for them. The EU is working on the biggest redistribution programme in the history of mankind. And it reserves the right to set the rules.

According to the chronicles, however, the draft in the CDU/CSU parliamentary group remains controversial. Perhaps a miracle will happen in the end, and there will be enough MEPs ready to defend the interests of those who elected them to represent them.

Heiner Flassbeck - Europe cannot afford another season of wage moderation in Germany

"If the German economy tried once again to squeeze its European trading partners with wage cuts, this attempt would turn into suicide. Not only would it cause enormous damage to German domestic demand, but it would also stifle European partners forever, who are desperately fighting for their economic survival," writes the great German economist Heiner Flassbeck. A very interesting reflection on the great challenges that the German government will have to face in the coming months; the hope is that unlike in 2008 they have learned their lesson and this time they are not working exclusively in the German interest. An excellent Heiner Flassbeck from Makroskop.de

Everyone would like to go back to normal - even economically. Most people, however, still do not want to admit it: pre-crisis normality will never return. The post-crisis economy will no longer be the economy we knew before. The situation has developed in a very different way from how politicians and probably also virologists and epidemiologists had imagined it. Operation Great Festivities, after which in three or four months the world would simply have to return to its old life, failed dramatically.

We do not want to talk again about the reasons for the failure. What matters now is that we do not make new serious mistakes that could damage economic development in the decades to come, both in Germany and in Europe.

A model is already emerging that leads us towards completely wrong decisions. Just as happened after the financial crisis of 2008/2009, the coalition partners in Berlin are overwhelmed by panic and fear. After they had managed to successfully combat the financial crisis at the time thanks to public debt, they immediately chose instead to include a balanced budget in the Constitution and so the Schwarze Null objective was pursued for years - to the detriment not only of the German economy, but also of the partners in the monetary union.

The debt relief mechanism set up at the time is already casting its shadow over the current crisis management. And the second major issue, which will be equally decisive in determining the long-term economic damage that the crisis caused by the Coronavirus will produce in Germany and Europe - the wage agreements for the next 12-24 months - already seems to be moving in a fatal direction.

Repaying the public debt quickly?

The CDU is already raising the first voices calling for a tight deadline for repaying the public debt. Paul Ziemiak, Secretary General of the UNHRC, is already talking about a maximum of ten years in which all public debts, which have been added in the meantime, will have to be repaid in full. He justifies this request by saying that the policy of the Schwarze Null would bear fruit during the current crisis, since Germany at this stage would have "earned" a margin of manoeuvre "for which other states today envy us".

The macroeconomic nonsense that emerges from these words undoubtedly fits in perfectly with the expectations of potential CDU voters, which makes this position understandable from a political and partisan point of view. Unfortunately, this does not change the total lack of macroeconomic logic. Throughout the coalition government, in fact, there is talk of reducing debt as if it is only a matter of political will whether or not it can be done.

But this is by no means the case. It is simply impossible for the state to expect a growing economy, which is essential to bring the budget deficit to zero and repay the public debt, at a time when the industrial sector is very thrifty. It is time to take note of the situation: there is no longer a business sector that invests so much that it has to go into debt.

In Europe as a whole, it will be very difficult to reduce public budget deficits or even repay old debts. Families and individuals have traditionally saved money, and the business sector has been doing the same for about 20 years. Saving, however, must be accompanied by debt if the economy is not to decline at the same time. Anyone who ignores this simple macro-economic logic and tries to adopt economic policy measures that explicitly violate this logic will achieve the opposite of what is hoped for: it will cause the crisis to worsen and prolong at the expense of large sections of the European population.

Which sectors in Europe can still get into debt to rebalance the private sector's willingness to save? There are only national public budgets and countries outside Europe. But the latter will never allow Europe to have such high current account surpluses with the rest of the world that, on the one hand, the national public budgets of the European countries will no longer have to record deficits parallel to the willingness of the private sector to save and, on the other, they will never allow Europeans to make such large surpluses that they can reduce the old public debts made in the days of the coronavirus. Before that happens, we would have a trade war between Europe and the rest of the world or a race for devaluation between the euro and non-European currencies (which is practically the same thing). Both scenarios would lead the world even deeper into a serious economic crisis.

And this applies not only to Europe as a whole, but also and above all to Germany as a single country. In a completely different way from what Paul Ziemiak's quote at the beginning of the article suggests, a country has only one way to save all three domestic sectors without the economy collapsing: to push foreign countries into the role of debtors. And it can only do so through a systematic reduction in prices on international markets, which can in no way be offset by currency appreciation.

In other words: Germany should repeat its current account surplus strategy of the last twenty years at the expense of its partners in the monetary union. But it will no longer be able to do so, because the economies of its monetary union partners are now on their knees. The first professional and realistic forecast available for the first half of 2020, presented last week by the DIW, assumes that the German current account surplus this year will fall to €80 billion (after more than 200 billion in 2019).

Unless it wants a total destruction of Europe, Germany will have no chance to return to the old situation of a high current account surplus. If the German economy were to try once again to squeeze its European trading partners with wage cuts, this would turn into suicide. Not only would this do enormous damage to German domestic demand, but it would also stifle European trading partners forever, who are desperately fighting for their economic survival.

Wage moderation is suicide

But it is precisely this suicidal variant that is already manifesting itself - in addition to the politicians' desire to reduce the public deficit immediately and even to turn it into a surplus to be used to reduce the debt. Not only the German trade unions are hearing nothing, apart from the demand for employment levels to be guaranteed. Rather, there are already sectors in which there is open talk of workers giving up part of their wages in exchange for guarantees that employers would maintain employment levels. The case of Lufthansa is of course exemplary: the pilots have proposed temporarily giving up 45 % of their salary to help the airline overcome the crisis.

There is no doubt that Lufthansa pilots are a special case: they earn very high salaries (which makes a partial waiver easier), have undergone very expensive training (reflected in their salary level), are highly specialised and therefore have little chance of finding an equivalent alternative to their current profession in Germany. In this situation the renunciation of a part of the salary is reasonable because from the point of view of microeconomic rationality it is the only possibility they have to save their job and avoid a social collapse.

This applies to a much lesser extent to Lufthansa cabin crew. They receive lower salaries, they are not so highly skilled and it is therefore easier to redeploy them elsewhere. For them, even if they are laid off, but the economy as a whole gets back on its feet, the collapse is much less dramatic because they have a much better chance of being able to change sector without suffering huge losses of income.

However, even the enormous renunciation of pilots will not be able to save all their jobs if commercial flights were to be replaced on a large scale by videoconferencing and other possibilities for virtual communication and cooperation.

Perhaps the shock caused by the coronavirus was not the real cause of the crisis in the aviation sector, but it could turn into the trigger and accelerator of a profound structural change in the globalised economy, which cannot be stopped by the sacrifice of part of the salary.

But one thing must be absolutely clear: for employees as a whole, salary reduction is not a temporary game as in the case of pilots, but an instalment suicide. The eloquent silence of the trade unions, however, raises the suspicion that this is exactly what will happen. The wage renunciation, i.e. the renunciation by the workers of a wage increase of about 3% for the next 3 years, will lead in the short and medium term to a weakening of economic growth and thus to the destruction of many jobs, and in the long term to deflation.

What are the German unions up to? The graph shows that collective agreements over the last ten years have come very close to the inflation target of 1.9 %, i.e. actual real wages have increased only slightly or not at all. Anyone intending to fall below this level or not to increase wages at all creates competitive pressure on the whole of Europe, and this pressure will inevitably turn into deflation at European level.

What would seem to be an exchange at company level between 'wage concessions in exchange for job security', is in fact at macroeconomic level a programme to destroy jobs. And this means that, despite the crisis and the general weakness of the economy, every effort must be made to keep collective wage increases at a minimum of 3%.

To make it clear once again: this is not a left-wing or right-wing policy shift, there is no regulatory wish list on what could be improved in terms of social policy. No, this is about the naked economy, i.e. the macro-economy, which, in order to be able to protect everyone - from the less well-off to the well-off - must be defended from the risk of being crushed on the wall of ideological madness.

What's a state to do?

It is the state that is directly responsible for the fact that the security of employment levels has become the most important thing for trade unions today. Because of the Hartz legislation, introduced by the Red-Green coalition at the beginning of this century, the economic decline, and therefore also in terms of social status, of a normal worker who becomes unemployed is enormous. After just one year of unemployment, in fact, he ends up at the level of the poorest in society, namely in Hartz IV.

If this is not (yet) the case, because he may have previously accumulated some wealth thanks to the efforts made to save, or for example if he managed to repay part or all of the mortgage on his property, he will have to use some of this wealth (on the asset limits for Hartz IV benefits, see here) before the state can help him with basic security. And this has always been questionable from the point of view of social justice. Considering that overcoming the crisis caused by the coronavirus should instead concern the stabilization of expectations, the calculation of available assets in the case of Hartz IV beneficiaries will be a major obstacle.

Among other things, this also and especially applies to the self-employed and freelancers affected by the crisis, who do not have any entitlement to unemployment benefit and are therefore completely dependent on Hartz IV for their direct livelihood (apart from some regional programmes that have tried to help them with benefits). Although the asset test has been suspended until 30 June 2020, the probability that the self-employed affected by the crisis, already in the second half of the year, will be even partially in conditions similar to those before the lockdown, is very low. This means that, before they can continue to receive basic assistance from July, they will have to use the few savings they have accumulated. Expectations for the future of this group of people should therefore be far from positive.

The collapse in the social status of the long-term unemployed, as provided for by the state through Hartz legislation, has led to a significant drop in the willingness of trade unions to strike in favour of reasonable wage agreements. The risk of losing their social status when they lose their jobs is so great that any threat from employers to close production facilities and relocate production is taken seriously, thus prompting trade unions to make concessions in wage negotiations. This legislation, which is explicitly based on the idea that the unemployed should be encouraged to do more to find an existing job, was already more than questionable when it was introduced. Today it is much more dangerous.

If, on the other hand, the state leaves the current legal framework for unemployment insurance and basic security unchanged and focuses only on preserving old structures on the capital side (e.g. Lufthansa), or on promoting investment in new, more environmentally friendly structures, it will not be possible to escape the accusation that it wants to put the interests of investors above those of workers. The belief that all wealth in the long term comes mainly from companies was already questionable at a time when the corporate sector was still getting into debt, and therefore took on the macroeconomic task that one would expect from this sector. Today that is clearly wrong.

Cannon meat for large slaughterhouses

Working conditions in many German slaughterhouses are disastrous, housing is overcrowded and cramped, and workers from the East must also suffer the usual racism of their landlords. The wave of contagion from Covid-19 finally brings to light a system of industrial exploitation that desperately needs cannon fodder from all over Europe to move forward. A very interesting article from the Süddeutsche Zeitung explains to us how the Tonnies system works

A few minutes later the first Whatsapp message arrives from a man we call Marius Popescu*. The SZ asked on a Facebook group of Romanians from North Rhine-Westphalia if anyone wanted to talk about working conditions in the slaughtering industry. Since 2015, Popescu has always worked for Tönnies, until about three weeks ago he was placed in quarantine. The large meat processing factory has now ended up in the centre of attention, after more than 1,000 workers tested positive at Covid-19.

Popescu speaks calmly and quietly. It's not that everything in the meat industry sucks so much, he says. But much of what he tells us also explains why there is hardly anyone willing to work in slaughterhouses anymore.

Popescu started by packing meat for Tonnies, then moved on to cutting. He tells us about 200 hours of work per month and housing where before the pandemic three to seven people shared a room. But he doesn't seem particularly shocked about it. "Sure, the work is hard." Popescu was in the army, but he doesn't remember it being that hard. He worked maybe a tenth as hard as he does now at Tönnies. At first he didn't think he could do it - industrial slaughter seemed too brutal to him. He sees his work at Tönnies as a possible springboard for something better. Thanks to this work he would like to find something else to do in Germany, possibly in another sector.

Popescu seems to be really amazed at just one subject. About six weeks ago, in fact, he and his wife had already been tested for the Coronavius. Afterwards they even went back to work. But only two weeks later he was told of the results: Popescu's wife was positive. He could not understand why it took so long for the analysis. Nor can he understand why there were no further tests or any information after that. The next day he, his wife and the entire shift were sent into quarantine. Since then, no one has contacted him. Other workers also reported to the SZ that there had been individual cases of coronavirus in Tönnies for some time.

"Those who complained were thrown out."

After Marius Popescu, other workers wanted to talk to the SZ, most of them upset. Andrei Amariei* writes that he would like to warn people against the typical exploitation of slaughterhouses like Tönnies. Amariei meanwhile has left the sector. From 2015 to 2019 he packed meat in Germany, mostly from Tönnies to Rheda-Wiedenbrück. Now he lives in Romania again and is happy, he tells this in a phone call on Facetime. The list of his accusations against Tönnies is long. At first they made him work for seven weeks without a day off - and always at night, because he urgently needed money. But the other workers often got one day off every three weeks as well. Even his employer, as in the case of Marius Popescu, an intermediary subcontractor, was cheating on wages. When Amariei left the company housing, the subcontractor still deducted his rent. If they spent time cleaning the workplace, it wasn't considered working time. Amariei also reported "errors" in his pay slip, always in favour of the employer. Regularly hours were missing, even though the actual working hours were recorded with fingerprint scans at the time of entry. "Those who complained were no longer considered necessary," says Amariei. He answered the questions with an embarrassed smile, as if he himself was surprised to be trapped in such a system. He calls Tönnies a "state within a state". Even Chancellor Merkel wouldn't be able to get in, if there wasn't someone to get her through. In fact, he is not allowed to report anything about working conditions at Tönnies, it is written in the employment contract with his subcontractor.

Until the publication of this article, Tönnies did not respond to the SZ's requests.

The descriptions of Popescu and Amariei coincide with other information, such as that of Szabolcs Sepsi. Since 2013, he has been responsible for the "Faire Mobilität" project in Dortmund in which he helps workers to defend their rights.

Sepsi explains how the meat sector, some 30 years ago, was industrialised and liberalised. "There is a tough price war being waged by competing subcontractors." The meat industry has taken the system of works contracts to extremes. Many workers could be transferred at any time. According to his estimates, of Toennies' 7,000 employees currently in quarantine, about 3,500 work for external companies, about 2,000 are Romanian. Without this confusing system of subcontractors, Tönnies could have more easily identified the workers' housing, Sepsi says.

No doubt the situation in housing has improved in recent years. In the past he happened to find mold, cockroaches and open electric cables. Like Popescu, Sepsi says that the slaughterhouse should only be a springboard for finding better jobs in Germany. But he also says: "The living conditions in the housing remain difficult.  As many meat processing plants work 24 hours a day, the queue often forms in front of the toilets and you can no longer stay in peace and quiet. And this could also fuel conflicts with the neighborhood: "When the van picks up the workers at night and honks the horn, I think it's very annoying. Sepsi confirms that wage fraud is systematic in this area. Most workers officially earn the minimum wage, but they have to work more than agreed. Over the years, some develop chronic pain and are sometimes "taken out" by subcontractors.

People currently in quarantine are particularly outraged by the claim that they were going away for a long weekend and so they would take the virus with them when they returned. In fact, many people were working in the plants: "There was no long weekend for the meat industry," Sepsi says. "The claim is simply false and only fuels racism."

Tönnies' employees would have been refused entry to the medical clinics.

There is already an increase in marginalisation: he has been told that medical clinics no longer allow employees in Tönnies. It is said that supermarkets have let people out who they thought were Romanians. "It happened to Cosfeld too," Sepsi says.

For Andrei Amariei it's no big surprise. He says: 'Romanians have always been at the bottom of the social ladder, even Poles and Turks look down on us. He tells of a Romanian acquaintance who, as a supermarket clerk, was forbidden to speak Romanian to Romanian customers. On the one hand, he remembers the nice neighbours - and on the other hand, he remembers all those who never missed an opportunity to complain about the Romanians. "Even though a car was parked a little crooked." Amariei is also very annoyed by the statements of NRW President Armin Laschet. Last Wednesday, in fact, they asked Laschet what the Toennies contagion boom meant in terms of loosening the bans. Laschet replied: "He tells us nothing about it, because the Romanians and Bulgarians have returned to Germany and the virus is coming from their countries. Later, Laschet also cited housing as a possible cause of spread, but after the very heavy criticism he received, he had to make it clear: "It is not possible to blame the virus on people of whatever origin they are".

Amariei instead argues that Toennies, like Laschet, was just trying to shift the blame onto someone who can be replaced more easily: "You will always find someone who is willing to work hard in the end, even for little money. The people who put the money in their pockets are now simply blaming them. There is no decency in all this".

* The names of the employees have been changed.

Heiner Flassbeck - Why the 130 billion of the German government will not be enough

Will the 130 billion euros promised by the Berlin government be enough to keep the German economy going? For the great German economist Heiner Flassbeck it is not enough at all, because the current economic crisis, clearly visible in the recent Kurzarbeit boom, is on a scale never seen before and largely underestimated by the Berlin government. Recent data on exports then show a historical collapse in foreign demand, which is essential to keep afloat a production system based on wage moderation. In the end it will be the workers who will pay the bill for this export-oriented production model as usual: first in redundancy, then in unemployment and finally in Hartz IV. A very interesting analysis by Heiner Flassbeck and Friedericke Spiecker from Makroskop.de

Since the beginning of the coronavirus crisis we have stressed (see the article of 21 March) that this shock caused by governments should not be compared to a recession or a normal economic slowdown. This shock is much bigger and more complex than anything else we have seen so far. Looking only at German industry, comparisons can be made with the great global recession of 2008/2009 (Figure 1). Although demand measured in terms of new orders fell at a much faster pace than then, the scale of the crisis is still similar. Overall, new orders (orange line) fell to a level slightly below the level of that period.

However, this only applies to the average of the sectors. For the automotive industry, for example, the current shock is much worse (Figure 2). Production in April fell by more than 70% compared to March this year, well below the lowest level in 2008/2009. The leading German industry of the last ten years is now in an existential crisis because neither at home nor abroad, due to consumer uncertainty, the purchase of a new car is currently the order of the day. 

The fact that total German exports in April also fell by almost 25% compared to the first quarter is probably largely due to the fundamental weakness in demand for cars. But mechanics is also experiencing an historic slump; since the beginning of the year, demand has fallen by a third.

The labour market is the best indicator

But that's not all. Unlike the 2008/2009 financial crisis, this time many more branches of the economy as a whole were affected, because the closure largely affected sectors which, like hotels and restaurants, normally hardly ever felt the setbacks of the economy. The construction sector, which was not directly affected by the restrictive measures in Germany and which had performed well until March, also saw a significant drop in demand in April, which will also be reflected in a significant drop in construction in the coming months.

The true extent of the crisis can only be understood by looking at the labour market. The latest data from the Federal Employment Agency (BA) on the redundancy fund (Kurzarbeit) show the real extent of the dramatic economic crisis that began with the introduction of restrictive measures to combat the coronavirus pandemic. Since March, the number of companies that have applied for the layoff fund and whose applications have been examined by the Federal Statistical Office has reached an order of magnitude that has nothing in common with the financial crisis of 2008/2009 (see the blue line in Figure 3):

After the dramatic 625,000 requests in April, even with the 67,000 in May we are still well above double the maximum figure ever reached in 2009 (at that time just under 25,000). The last figure reported for the month of May will probably be corrected upwards again, as was the case with the March and April figures. The figure currently reported for April, for example, is 37,462 higher than the preliminary figure at the end of April. BA writes about this in the explanation of the relevant statistics:

"It is possible that, at a time of increasing volumes, applications for redundancy payments may have already been received en masse by the relevant agents but have not yet been recorded electronically in the BA's specialist procedures, and this recording may only take place after a certain period of time. At present, notifications relating to the BA's specific procedures are probably underrepresented to a not inconsiderable extent'.

BA resumed its data extrapolation, which had in the meantime been discontinued, with an extended procedure to determine from the number of requests flagged and checked the actual number of firms in layoffs. This extrapolation serves as a guide during a five-month period during which the settlement of the redundancy payment has not yet been completed and the data on part-time work (Kurzarbeit) are not yet finalised.

For March, the last month for which extrapolation is currently available, the calculated figure (just under 220,000 holdings) differs by one third from the number of officially reported and controlled holdings (just under 164,000). This suggests that extrapolating the April data for the number of companies claiming to work part-time, compared to the number of companies actually working part-time, will be even worse. After all, the number of companies claiming to work part-time from March to April has almost quadrupled. The sharp drop in the number of applications in May, however, indicates that the situation, at least for new applications, is stabilising.

What about the number of people working part-time? The traffic jam caused by the unusually high number of applications in March and April had led BA to estimate the number of people laid off in March and April at 10,1 million (see BA press release of 30 April). In the meantime the processing of applications has progressed and for both months the result was a shortfall of 10,6 million (2,6 million in March and 8,0 million in April). In May, the number of (new) short-time workers is provisionally estimated at 1.06 million (see Figure 4).

Of the approximately 2,6 million people indicated as part-time workers for March, BA calculated an actual number of part-time workers of approximately 2,0 million. That is 77%. Applying the same rate to registered persons would result in more than 6 million part-time workers (short-time workers) in April alone. Together with the number accumulated in March, which probably did not decrease in April, we arrive at an estimate of the total number of redundant workers (Kurzarbeit) of about 8 million.

The Ifo Institute estimates the number of people actually laid off in May at 7.3 million. If it is assumed that in June, thanks to the relaxation of anti-coronavirus measures, the situation will improve, taking an optimistic sample calculation, it can be assumed that the number of part-time workers at the end of June is half that of May, i.e. 3.65 million. This would result in an average of around 6.3 million part-time workers in the second quarter.

Even assuming that the number of new part-time workers in June is zero, this would still result in an average of over 5 million part-time workers in the second quarter. Even in this extremely positive, if not unrealistic estimate, we are still a long way from the 2.4 million assumed in the joint diagnosis of economic research institutes. Of course, the question of the number of hours worked less is still completely open, or will actually be worked.

It is obvious, however, that the scale of the economic collapse behind these figures far outweighs the financial crisis. The common forecast estimated a drop of almost 10 % compared to the first quarter. If this is consistent with the estimated number of part-time workers, a realistic view of the redundancy fund should assume that the fall is at least twice as large.

Against this background, gross domestic product will fall by much more than expected in 2020, a number which is still under discussion. In the meantime, the Council of Economic Wise Men has already moved to an estimate of - 6.5% of GDP, after having indicated - 2.8% in its March Special Report (most likely scenario), and even in the most pessimistic scenario had remained well above the figure considered probable today.

It is extremely important to have a reasonably realistic picture of the current and projected situation in the immediate future in order to advise policy makers in a reasonable way on the nature and scope of the support measures. So far, professional predictors have not yet been able to do so. And this is one of the reasons why politics has always lagged behind, instead of taking a step forward.

The political consequences of underestimation

In the meantime, the federal government has presented a "stimulus package for the economy", the size of which (€130 billion) is generally regarded as significant and sufficient. There is a risk, however, that the usual model of politicians forced to chase events will be repeated, after underestimating the scale of the economic collapse at first. The government coalition has adopted a large number of economic measures, and it is by no means clear how and when they will enter into force. The only far-reaching measure seems to be a three-point six-month reduction in VAT.

But even this measure is still not very impressive from a quantitative point of view, at least when one considers how large the reduction in demand by households is. If the average household savings rate increases by one percentage point from 11% to 12% (in Q1 2020 the rate rose to 12.4% compared to 11.1% in Q4 2019), there will be about €10 billion less per half year in terms of consumption (total household disposable income in 2019 was €2.4 trillion, i.e. €1.2 trillion per half year, an increase in savings of one percentage point equals €12 billion more).

The loss of income due to the redundancy fund and unemployment will amount to around EUR 5 billion in the second quarter of 2020 (taking into account the redundancy fund allowance). The average net salary per employee in 2019 was EUR 24,951. Assuming that people affected by short-time working measures and unemployment tend to earn less (only €20,000 net salary per year) and that they work only 50% of the time (loss of working hours due to the redundancy fund), these households will have lost about €2,500 net, without calculating the redundancy benefit. If about 70% of the losses are offset by the Kurzarbeit allowance (60% for employees without children, 67% for employees with children; plus partial increases through collective agreements), there remains a per capita loss of income of about €750 net in the three months of the 2nd quarter.

With about 6.5 million people affected (number of redundancies in Q2 + 0.5 million more unemployed), this should translate into a loss of income in Q2 of almost €5 billion. If, with some optimism, we assume that the income losses due to part-time work and unemployment in the third and fourth quarters will be half of those in the second quarter (partly because the closure measures have been lifted, partly because the short-time work allowance has been increased to 80-87%), there will be a total of a further EUR 5 billion in income losses. This translates into about EUR 10 billion less disposable income and another EUR 10 billion due to further likely savings.

The government estimates that the relief for households resulting from the VAT reduction will be around EUR 20 billion if the VAT cut is passed on in full to consumers. This means that the relief due to the VAT reduction would, at best (i.e. in a very optimistic picture), offset the estimated fall in private consumption. It is also foreseeable that the positive effect of this measure in the last six months of this year, on the other hand, could lead to a new uncertainty in the first half of 2021 due to a fall in consumption (after the towing effects for 2020, and due to a return of VAT to the old rate as from 2021).

The fall in demand from investment is also clearly having a negative impact on the development of the economy. This is unlikely to be offset by the measures announced, as capacity utilisation is catastrophically low. Moreover, as already noted at the outset, demand from abroad, which is very important for Germany, is falling without any possibility of an immediate recovery. The 80 % drop in the foreign trade balance in April, compared with the same month last year, cannot be significantly mitigated even by a drop in tourism abroad by the Germans: the current account balance in April fell by almost two thirds compared with the previous year.

The huge surplus demand from abroad, which the Germans have been "needing" for many years now to dispose of their production - in 2019 it exceeded 7 % of GDP - and to keep their economic model based on wage dumping afloat, will be extremely negative throughout the coronavirus crisis. The structural distortion towards exports of our prod