Massive Income Loss: Left Behind By the Coronavirus

By Tim Bartz, David Böcking, Markus Dettmer, Martin Hesse, Henning Jauernig, Anton Rainer und Anne Seith

When Andrea Anneser took up her new job at the beginning of the year, she could hardly believe her luck. The 49-year-old had just moved to the northern German state of Schleswig-Holstein after six years in Manchester. She describes herself as a “Brexit refugee” who wanted to return to Germany before Britain fell into a crisis.

Everything was supposed to be better in Germany, where industry is strong and the future seemed secure. And indeed: A Hamburg company with a long history as a supplier to the ship and car industry hired her as a project manager. It was well-paid and seemed crisis-proof. “2020 was going to be my year,” she says. Then the first news stories began to trickle in from China. And Anneser started worrying about her plan.

Anneser is responsible for customers in the Italian car industry. She how Fiat’s supply chains collapsed, followed by sales at the company she works for. Finally, her dream of a new life crumbled. She had to leave the company at the end of her probationary period.

Millions of people are losing out because of the economic crisis caused by the coronavirus. The virus can kill — and we are learning that it can also divide societies. Even a rich country like Germany can run into trouble if social harmony breaks down because economic damage can’t be contained and burdens aren’t distributed fairly.

“Germany Is Getting Poorer”

The global economy has plunged into its deepest recession since the Great Depression of the late 1920s. As many as 200 million people worldwide are threatened by unemployment according to estimates from the International Labor Organization. More than 6 million Germans are currently furloughed from work as part of the federal government’s heavily subsidized “Kurzarbeit” program. Many are likely to be laid off in the coming months. “Let’s not fool ourselves, work furlough will unfortunately end in unemployment for many,” says Clemens Fuest, the head of Munich’s Ifo Institute, a respected economic think tank. “Germany is getting poorer.”

Does this mean that the fat years of prosperity seen in Germany in recent years will be followed by leaner ones? Is society slipping — faster, harder and more permanently than ever before in Germany’s history?

A survey conducted on behalf of DER SPIEGEL by the opinion research institute Civey found that three-quarters of Germans expect inequality in the country to increase as a result of the coronavirus pandemic. Young adults, in particular, are worried about what comes next. And it isn’t just some abstract fear of inequality, either. One-third of Germans expect to see a drop in income and wealth for themselves this year. Thirty-six percent say they expect this to continue for the next three years.

The figures reflect a fear of decline in the middle of society that has not been tangible since the financial crisis of 2008. More than half of the self-employed expect lower incomes this year, and just under 50 percent of staff workers. Thirty- to 40-year-olds feel they are the hardest hit financially. They’re often families with children who have had trouble coping with work and family life during the lockdown and social distancing.

Another respected economic think tank, the Kiel Institute for the World Economy (IfW) is expecting gross domestic product (GDP) in Germany to shrink by 6.8 percent this year. Despite the massive subsidies, aid and loans that have been paid out by the government to help people and companies get through the coronavirus, that would mean a drop in the national income of 110 billion euros ($124.2 billion) compared to 2019. On average, each citizen, from infants to the elderly, will have 1,325 euros less at their disposal.

Visible Cracks

But the actual effect that the crisis triggered by the coronavirus will have is much higher, because in the absence of the pandemic, the economy probably would have grown rather than stagnated. “The economy will probably grow again strongly next year,” says Gabriel Felbermayr, the president of the IfW. But that doesn’t mean “that we will return to pre-crisis levels.” Income of around 390 billion euros would be lost by the end of next year compared to the development that had been forecast before the coronavirus, even if the economy grows by 6 percent in 2021.

Germany isn’t America, where inequality was already extremely high before the crisis and is now worsening dramatically. But the cracks are also visible in this country.

Some hardships and conflicts can still be glossed over with money from bailout packages, and the government also wants to introduce tax relief to the tune of billions of euros soon. But the question of who will ultimately be left to foot the bill has been around now for a while. What part of society ultimately stands to lose as a result of the crisis – and which will get through it relatively unscathed? And how fairly will the burdens ultimately be shared?

The Workers

The loss of her new job threw the Brexit refugee Anneser completely off course. “It was like I was paralyzed,” she says. Anneser returned to her country after a long absence as a woman in a male-dominated industry. Finding a job had already been a challenge even before the coronavirus struck. How is that going to happen at all in the crisis?

In the history of postwar Germany, there has been no situation with the labor market comparable to what’s happening today, not even the 2008 financial crisis. In June, the number of unemployed rose to 2.85 million. The German government’s Institute for Employment Research expects that number to pass the 3 million mark soon – assuming there isn’t a second lockdown. If that happened, things would get even worse.

Experts at home and abroad have praised Germany’s response to the coronavirus crisis. “Crisis Resilience Made in Germany,” was the title of a recent study by Deutsche Bank. But even if the German model – with its social market economy, national healthcare system and a comparably good social safety net – initially proved its effectiveness during the pandemic, there is no guarantee of a rapid economic rebound. It is too soon to tell how the country will emerge from the crisis.

Imbalances are already visible. For example, a disproportionately high number of low-skilled workers have been furloughed, and they were also less likely to be able to work from home during the pandemic. And the self-employed and freelancers didn’t even have access to the Kurzarbeit work furlough program. A gap is opening between the public and the private sectors. For example, artists working for publicly owned theaters were furloughed, but freelance artists didn’t get anything. Civil servants didn’t lose anything, but many freelancers slipped into the welfare rosters.

Economist Felbermayr thus advises that civil servants and public employees should also share some of the burden. He suggests that federal, state and local governments could each reduce salary increases by a certain percentage over the next few years in order to compensate for the loss of income among blue- and white-collar workers.

The most vulnerable are all the people who have no financial reserves – almost a quarter of the population. The German Advisory Council for Consumer Affairs has examined the impact of the crisis on such households. The measure for the calculation is the housing cost burden ratio – meaning the proportion of income spent on rent, utilities and housing-related costs. A household is considered overburdened if that figure rises to over 40 percent. For households without savings or reserves that limit is already exceeded if 200 euros a month less is coming in. And there are many people who fall into that category. Full-time employees have, on average, made 400 euros a month less in recent months.

Young Adults

Viviane Borytzka is a woman with many strengths. She’s keen to learn and work hard and knows how to approach customers the right way. That’s what it says on page 12 of her job application – the result of a vocational aptitude test. Borytzka, 24, completed it in March before the pandemic put her career plans at risk. She’s proud of the results, even if they’re of little use to her at the moment.

Borytzka wants to become a veterinary nurse. “I applied for 12 apprenticeships and internships, and I had a personal interview for four of them,” she says. But all have either not been back in touch with her or they have turned her down.

It’s the 20- to 30-year olds, young professionals, who may stand to suffer the most from the consequences of the pandemic. The financial and debt crises of 2008 and 2012 showed how quickly youth unemployment will skyrocket if policymakers don’t act in time. Young people in Spain, Greece and Italy are still struggling today with a labor market that can offer them little.

The crisis caused by the coronavirus also threatens to make this an acute problem in Germany, as well. Between January and May, 18.3 percent fewer contracts for traineeships were registered with the local chambers of craft industries. According to a poll conducted by the German Confederation of Skilled Crafts (ZDH), one-quarter of companies stated that they intended to take on fewer trainees this autumn. Given that internships and job fairs haven’t taken place in recent months, many prospective vocational trainees still have no idea where they might get placements at the end of the summer, which is when apprenticeships generally begin in Germany.

Politicians now want to create programs to help young adults whose careers have been stalled by the coronavirus. Companies with fewer than 250 employees that don’t cut back on the number of apprentices they hire are to receive a payment of 2,000 euros for each new training contract. If the number of traineeships is increased, then that payment goes up to 3,000 euros. But will that be enough to motivate companies?

The risk groups got mixed up during the economic crisis. Older workers have been able to build up financial cushions over the years, and they are more likely to have permanent contracts or can possibly even retire early. Young people are often the first to lose their jobs. The young are also the ones who will have to pay off the 219 billion euros in debt the German federal government wants to borrow this year. The way that they view the country in the future will also depend on how the government treats them now.

The Savers

When Germany’s benchmark DAX index of blue-chip companies slipped to 8,442 points on March 18, Peter Härle made a huge bet. “I only held onto a bit, just in case,” the computer expert says on the phone. It was a first for the 35-year-old. High prices had repeatedly prevented him from investing his savings in shares. But when the virus sent share prices tumbling to their lowest levels in more than six years, Härle knew. “Now’s the time.”

In the days that followed, he scraped together almost all of his savings, close to 20,000 euros, and invested in three technology stocks. One reason he was able to take such a risk was the good money he earns as a hardware developer for a company that provides traffic control systems.

Härle was lucky. Since he bought his shares, the DAX has risen by just under 40 percent and his stocks have been performing even better than that. With his stock market coup, though, Härle is more the exception than the rule in Germany. For many middle to low-income earners, stocks are still considered the realm of gamblers and savings are seen as the safer course of action. This is another reason that asset inequality has widened so steadily over the past 20 years.

The crisis has mercilessly exposed undesirable developments in retirement benefits, says Markus Grabka of German Institute for Economic Research (DIW). He has spent decades as the head of the Socio-Economic Panel, which regularly surveys 16,000 households to collect precise data on the reality of life in Germany.

Overall, Germans are actually very rich, having accumulated 6.6 trillion euros in financial assets by the end of 2019. But there are few other countries in Europe where people’s money is as poorly invested and as unequally distributed. According to the Institute for Socio-Economics at the University of Duisburg-Essen, the bottom 50 percent of German society rarely owns more than one car and at best have only one retirement plan. Only 8 percent own their own home. The rest of their mini assets, which in the case of the lower quarter amounts to a maximum of only 6,200 euros, are usually kept in their bank accounts, which have been earning practically no interest for years. They seldom have stocks or shares in funds, so they won’t benefit if stock markets continue to rise despite the crisis, thanks to persistently low interest rates.

At the top end of the scale, the world is a completely different place. Only 15 percent of Germans own stocks or shares in equity funds, but they tend to be among the richest 20 percent of the population. This fifth of the population owns its own property and often other properties too, for which it collects rent.

Grabka believes Germans are facing a big problem. The retirement benefits paid by the government won’t be enough for many people, and private pension plans have become less and less profitable due to low interest rates. The crisis caused by the coronavirus is likely to exacerbate that problem. “There is major political and economic pressure on the ECB to keep interest rates very low for years to come,” he says.

This means that the losers in the crisis caused by the coronavirus will be hit twice. Many low-income earners who have been furloughed or laid off because of the crisis have also had to stop making payments on their private supplementary pension plans because they don’t have the money to pay the premiums.

And even some who invested money in shares during the good years and then lost their jobs or had to give up their business during the pandemic quickly find themselves having to dip into their savings and sell their shares. “The lower middle class is more likely to be affected by the realization of such losses,” says Grabka, whereas the wealthy could probably sit out the turmoil on the stock markets.

The statistics are packed with socio-political dynamite. If the wealthy ultimately become uncoupled from the rest of the population during the crisis and if the middle class shrinks and poverty in old age becomes the norm, the conditions on which social harmony is based will crumble.

To prevent people with low incomes from sliding into old-age poverty, Grabka is calling for the fundamental reform of state support for private pensions. “When, if not now, in the corona crisis, does the political community want to develop an alternative to the failed Riester pension?” he asked, referring to the country’s government-subsidized secondary pension plan.

The DIW researcher advocates a Germany fund to which all employed persons pay into. He proposes that the government pay subsidies for people who are either unable to save or are only able to save a little by themselves. In the longer term, he argues, a fund like that with a significant stock component could generate returns of 6 to 7 percent. Sweden, where every employee is required to pay into such a fund, is a trailblazer. The risk would also be manageable in Germany because a government fund would be in a position to diversify its investments widely.

The Families

The Kraatz family, who live in the eastern state of Brandenburg, now have weeks of uncertainty behind them. It’s not because of the collapse of the economy, but because their six-year-old son couldn’t go to daycare for more than two months. Anke Kraatz and her husband had to continue going to work as usual. “We were still up to our necks in work,” she says of the carpentry workshop where she is employed as an office worker. It wasn’t possible for her to work from home. Meanwhile, her husband was travelling for his job as an installer for a prefabricated housing company.

Millions of parents faced similar problems when schools and daycares closed in mid-March. It was also a problem for business, and it still is. Around a quarter of the workforce has young children in need of supervision. In a survey conducted by the Chamber of Commerce and Industry of Berlin of around 500 companies, 76 percent of respondents reported weaker performance among their employees as a result of the closures; 67 percent said they had experienced difficulties in planning reliably; and 63 percent said their employees had reached their limits health-wise due to the additional workload.

Yet politicians still offered little help to families. In mid-May, a provision in the Infection Protection Act was extended. The state will now pay parents who must stay home to look after their children due to the pandemic, and who therefore can’t work, 67 percent of their salary for 10 weeks. Per parent. That’s four weeks longer than before.

Anke Kraatz, however, did not qualify for the assistance. “My boss immediately dismissed it when he heard about it. He couldn’t have afforded that,” she says. Every employee was needed, Kraatz was told. She’s tried to find an emergency daycare slot for her son. Her application was rejected because neither Kraatz nor her husband worked in “critical infrastructure,” as the Oberhavel district explained to them. When Kraatz called an “emergency hotline” and protested, she was told by a public servant on the other end of the line that if she couldn’t find a solution, then she would just have to quit her job and apply for welfare. “I seriously started crying when I heard that,” Kraatz says. “Who keeps the economy going around here, if not us?”

Meanwhile, Kraatz can breathe a sigh of relief. Since June 15, daycares in Brandenburg and other states have reopened. In August, when her son is scheduled to start school, classes will also be held normally again. Assuming, of course, that infection rates don’t spike again.

If that happens, it’ll be mothers like Kraatz who will have to pick up the slack. An online survey of 7,700 participants, conducted by the left-leaning Economic and Social Science Institute of the Hans Böckler Foundation at the beginning of the crisis, revealed that 27 percent of mothers had already reduced their working hours due to daycare and school closures. Among fathers, it was only 16 percent.

Economic disadvantages are also a threat to children involved. “Even with interruptions of a just few weeks” as a result of the pandemic, “long-term negative macroeconomic effects” can be expected, warns a group of education researchers in an appeal titled, “Make education possible.”

In order to provide meaningful education in case of a second and third wave of infections, money must be invested now, says Christa Katharina Spiess, an education expert at DIW.

However, in the government’s crisis planning to date, education and childcare have hardly played a role. In the federal government’s 130 billion-euro economic stimulus package, there were a meager 3 billion euros earmarked for the expansion of schools and daycares. Another 4.3 billion euros were earmarked for a one-off “bonus” of 300 euros per child, which parents will now receive. “I find this response relatively unimaginative,” says Spiess, “and, in relation, it’s nowhere near enough.”

The Entrepreneurs

Just half a year ago, Olaf Knieriem thought himself to be well on his way to a successful future. With his planning agency for trade show construction, Expoworks, he had had a turnover of 2 million euros, year after year. The order books for 2020 were full. Then the coronavirus hit. Knieriem sits with his son, Daniel, in the top-floor office of a multi-purpose building in Knüllwald-Remsfeld, south of Kassel. The two seem simultaneously determined and powerless. According to the Munich-based Ifo Institute, the trade show, exhibition and congress industry generates an annual revenues of 8 billion euros. Around 60 percent of the world’s leading trade shows are held in Germany. According to figures from the Association of the German Trade Fair Industry, the cancellation of more than 110 trade shows this year endangers around 92,000 jobs — and several small companies, such as Expoworks.

In March, business collapsed. In April, the elder Knieriem realized the situation would remain dire until the end of the year. What’s more: “The business model of trade show construction is on the line.”

Knieriem has reduced the working hours of his six employees, received 10,000 euros in direct aid and reinvented his business model. Expoworks now offers complete solutions for companies that have to comply with new hygiene regulations due to the coronavirus. An airlock, an app for visitor management, consulting and training. Knieriem and his son have sent their offer to hospitals, public institutions, congress organizers and companies. There’s interest, but no orders. The company is struggling to stay afloat. Knieriem is afraid to take out a loan because planning for the future is impossible and he doesn’t know whether he’ll ever be able to pay it back. “Things are falling apart in the trade show construction industry. Even larger companies are struggling to survive,” he says.

In other sectors, too, the self-employed and small business owners are becoming less optimistic — everyone from restaurateurs and movie theater operators to owners of travel agencies, specialist retailers and hairdressers. In a survey conducted by the DIW as part of the “Socio-Economic Panel,” around 60 percent of self-employed workers said they had suffered a loss of income: on average, more than 1,200 euros a month. Almost half of them only have enough money to keep their business running for three months at most.

This could have fatal, long-term consequences for the country’s entrepreneurship. Though Germans are traditionally less willing to take risks than others, in recent years, they’ve been somewhat bolder. “The recent positive attitude in Germany vis-à-vis startups and self-employment” is in danger of “being damaged,” warns the DIW. This partly has to do with the self-employed feeling less supported by the state than formal employees.

The impact of the 50 billion euros in direct aid that was promised to those self-employed people who work alone, as well as to small companies, is also limited. They cover operating costs, but don’t make up for lost wages. Many companies are also afraid that their turnover won’t be as high as it once was. As is the case with the Knieriems, they’re only able to continue working with restrictions in place.

This is made all the more dramatic as the pandemic accelerates digitalization. Those who cannot afford to invest now will fall by the wayside. “There will be a sharp rise in insolvencies from the second half of the year onwards, especially among small and medium-sized companies,” says Achim Wambach, chairman of the Monopolies Commission. Competition and the pressure to innovate will be lost. As such, the pandemic will strengthen the market power of Amazon, Google and the like.

Governments are further distorting competition during the current crisis. For politicians, it’s more attractive to support established companies where they know how many jobs they are saving.

André Schwämmlein, a co-founder of the long-distance bus and regional train operator FlixMobility, sees himself as a victim of new coronavirus policies. The company has grown out of its startup phase, but the coronavirus hasn’t only come close to paralyzing the Munich-based company, it’s also set it back in its competition with Deutsche Bahn. The government wants to inject 6.7 billion euros into Deutsche Bahn as compensation for lost revenue due to the virus. The figure is so high because Deutsche Bahn maintained its operations as widely as possible throughout the crisis. But for competition, it’s a problem. “We can only cautiously increase our offer, because as a private company we have to make sure that we cover our costs,” says Schwämmlein. Deutsche Bahn can keep running without worrying about losses because the state is footing the bill. In doing so, the government is pushing competitors out of the market.

The Government’s Response

Wolfgang Schmidt is more powerful than ever. The state secretary in the Ministry of Finance is the right-hand man to Olaf Scholz, the German finance minister — and the person ultimately responsible for releasing up to 1.9 trillion euros in coronavirus aid. Schmidt can feel that the pandemic and the economic paralysis it has caused are changing something in the country. He can tell that much depends on how fairly the costs of the crisis are distributed.