Could the Great Depression happen again

The consequences of the corona pandemic : How the economic crisis divides the world

If all goes well, the world could be a better one after this crisis. This is how Christine Lagarde sees it, who describes herself as an optimist. If the Eurozone countries invest in the right places, argued the head of the European Central Bank (ECB) this week, Corona could make the economy greener and more digital. However, Lagarde also warns: Governments must not shut down their rescue programs too early. The risk that the economy will collapse again with rising corona numbers is too great. The current recovery is too fragile.

This is also shown by the prognoses that economists are presenting in a row these days. With the exception of China, the economy will not grow in any of the major countries this year, predicts the International Monetary Fund (IMF). It is particularly quick to leave the country in which the crisis originated. The experts from Washington believe that the economy in China could grow by almost two percent this year (see box below). In the large industrialized countries, however, it will collapse by almost six percent.

Germany is still doing comparatively well

This shows how hard the corona pandemic and its economic consequences are already affecting the individual countries. The world is slowly dividing into states that can cope with this economic crisis to some extent and those that will have to struggle with it for years to come. There are big differences even within Europe.

While the IMF is assuming an economic slump of six percent for Germany this year, the crisis in Spain is more than twice as bad. According to the forecasts, the economy in France and Italy will also collapse much more sharply than in Germany.

As a result, Europe threatens to drift further apart economically. On the one hand, this has to do with the number of infections. Countries with a particularly high number of corona cases had to take tougher measures in the spring. For example, the first lockdown in France not only lasted longer, it also affected more industries. While in this country work was continued on the construction site itself in April and May, two thirds of the work in the neighboring country was idle.

On the other hand, the economic structure of a country is also decisive in this crisis. The more it depends on personal services such as tourism, the stronger the slump will be. This applies, for example, to Greece, for which the IMF expects a minus of 9.5 percent this year.

Spain is hit twice by the crisis

Countries that have suffered from a long lockdown and are heavily dependent on tourism - such as Spain - are particularly bad off. With an economic slump of almost 13 percent, the crisis hits the country harder than any other in the euro area. The situation there is made even more difficult by the fact that the country has many small entrepreneurs, most of whom have little or no reserves. The prospects are not good, especially for young Spaniards: Even before the outbreak of the corona pandemic, youth unemployment was over 40 percent.

And: while the recovery in Germany could be comparatively fast, it is dragging on in Spain. The Federal Republic of Germany could reach the pre-crisis level by the end of 2021, in Spain this should be the case in 2023 at the earliest. That has consequences. Because the more and the longer people are unemployed, the greater the long-term damage to a country. The jobs usually return at some point - but that takes too long. Too many unemployed people lose their skills and lose touch in their previous occupations. There is a correspondingly high risk that they will remain unemployed even if the economy picks up again.

"The pandemic has widened the structural differences between the north and south of the eurozone," Lena Komileva, chief economist at the consulting firm G + Economics, recently told the Financial Times. Above all, she emphasized the consequences that this has for monetary policy. The more the eurozone countries diverge, the more difficult it will be for the ECB to find a monetary policy that suits everyone. This is currently not an issue - the central bank remains in crisis mode. But ending that at the right time is tricky in such a diverse euro area.

Many countries lack the financial leeway

In addition, there are the marks that such a crisis leaves behind on public finances. The bigger the economic slump and the longer the recovery lasts, the more it burdens the state: It lacks tax revenues, while it urgently needs to spend more money to stimulate the economy. In Europe, Italy and Greece, in particular, will have a problem, where national debt could rise to 160 and 196 percent of economic power this year, respectively. For comparison: Germany is doing reasonably well with an increase to 80 percent of the gross domestic product. The Federal Republic of Germany has a correspondingly large amount of leeway - and the ability of countries such as Italy and Greece to act is accordingly limited.

And their situation could get worse if the economic crisis were to be accompanied by a financial crisis. On the one hand, this danger arises when many companies go bankrupt and the banks can no longer cope with the loan defaults. On the other hand, it can also come to this if the financial houses hold a particularly large number of government bonds from their own country and are suddenly worthless. This is not a problem in Germany or France, where the banks only hold limited federal papers. The situation is different in Spain or Portugal, where the banks hold around 20 percent of government bonds. In Eastern Europe, according to data from the rating agency Standard & Poor's, the share is even around 50 percent. If the banks then have to write off a large part of the government bonds, this can plunge the institutions into a crisis. This in turn puts a strain on the companies that no longer receive loans. The crisis intensifies itself. The experts call this a "Doom Loop".

Decision-makers like ECB boss Lagarde do not yet want to paint such a scenario on the wall. She prefers to try advice: promote start-ups, invest public money in areas such as climate and digitalization, and invest in further training for the workforce. Lagarde is convinced: "Then new companies and new jobs will emerge."

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