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Ifo Institute: Coronavirus will cost Germany hundreds of billions of euros

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Christian Fernsby ▼ | March 24, 2020
The coronavirus will cost Germany’s economy hundreds of billions of euros in production losses, cause short-time work and unemployment to skyrocket, and place a considerable burden on the national budget.
Clemens Fuest
Germany economy   Ifo President Clemens Fuest
This is the finding from the ifo Institute’s current calculations.

Topics: Ifo coronavirus Germany

“The costs will probably exceed everything we have seen from economic crises or natural disasters in Germany in recent decades,” says ifo President Clemens Fuest.

“Depending on the scenario, the economy will shrink by 7.2 to 20.6 percentage points.

“This corresponds to costs of EUR 255 to 729 billion.”

In consequence, Fuest believes “it is worth devoting virtually every conceivable sum to health policy measures.

The aim must be to shorten the partial shutdown of the economy without compromising the fight against the epidemic.” He continues: “We need strategies that combine a resumption of production with further containment of the epidemic.”

Fuest says, “If the economy comes to a partial standstill for two months, the costs will range from EUR 255 to 495 billion, depending on the scenario.

“That means output for the year will shrink by 7.2 to 11.2 percentage points.” The best-case scenario assumes that economic output will decline to 59.6 percent for two months, recover to over 79.8 percent in the third month, and finally return to 100 percent in the fourth month.

“If that partial shutdown extends into a third month, the costs go up to EUR 354 to 729 billion, which means a loss of growth of 10.0 to 20.6 percentage points,” Fuest says.

According to ifo calculations, just a single week’s extension of the partial shutdown will incur additional costs of EUR 25 to 57 billion, and thus a decline in growth by 0.7 to 1.6 percentage points.

An extension of one to two months drives up costs to EUR 230 billion, equivalent to 6.5 percentage points of growth.

Fuest continues: “The crisis is also causing massive distortions in the labor market that are worse even than conditions at the height of the financial crisis.” In the scenarios ifo is considering, up to 1.8 million jobs subject to social insurance contributions (or 1.4 million full-time jobs) could be cut and more than 6 million employees could be affected by short-time work.”

Without taking into account the extensive planned guarantees and loans as well as possible European bailout packages, public budgets will be burdened by up to EUR 200 billion.

“However, for macroeconomic stabilization, the lower tax revenue and additional expenditures, especially for transfers, are both desirable and necessary,” Fuest explains.