"Is there a risk that the German economy could become a 'zombie' economy?"
In the wake of the ongoing economic crisis, Germany has implemented a massive €500 billion fiscal stimulus and infrastructure fund to modernize the economy, boost infrastructure, and defense, while bypassing former debt constraints [1][2]. This ambitious plan is expected to stimulate growth by more than 1 percentage point annually, reaching 1.5%-2% GDP growth by 2027 [1].
However, the long-term effects of this aid are a topic of discussion, particularly in relation to the risk of economic zombification and increased insolvencies. During the crisis, many sectors and companies went through the year with almost no turnover and would likely not have survived without support [3].
Economic zombification refers to the phenomenon when prolonged aid or support to struggling firms prevents necessary market adjustments, leading to stagnation and inefficiency in the economy. In Germany, the question of whether the support has led to a zombification of the economy, with struggling companies being artificially kept alive, remains unanswered [4].
Johannes Mayr, chief economist at Eyb & Wallwitz, questions the duration of the economic aid, suggesting that prolonged aid could lead to increased side effects [5]. Mayr's comments imply a potential concern about the distinction between pandemic-induced and pre-existing economic difficulties [6]. Governments may find it difficult to distinguish between companies struggling due to the pandemic and those with pre-existing structural problems.
In the latest episode of the Eyb & Wallwitz podcast, the possibility of a major wave of insolvencies in Germany is discussed [7]. The podcast also explores the potential consequences of such a wave, including the possibility of economic zombification [8]. Mayr believes these measures were an important part of securing the stabilization of the economy but advises viewing aid loans with caution [9].
If aid is targeted mainly to viable sectors and infrastructures, it can avoid zombification by enhancing growth capacity and innovation [1][2]. However, if social policies and subsidies create dependency or distort labor markets, they may contribute to weakening firm solvency and increase insolvencies in low-productivity sectors [4].
The immediate consequence of the aid is an increase in the debt level, especially in the public sector [10]. The key is balancing fiscal stimulus to lift growth and modernize the economy while maintaining incentives for market discipline and labor participation to avoid zombie firms proliferating.
In the second quarter of 2020, about 10 percent of the economic output was lost [11]. The podcast is available for listening now [12]. The overall long-term impact depends on continued reforms ensuring aid supports dynamic, productive activity rather than prolonging inefficient firms.
[1] https://www.reuters.com/business/germany-unveils-500-bln-stimulus-plan-modernize-economy-2021-07-08 [2] https://www.dw.com/en/germany-to-unveil-500-billion-stimulus-plan/a-58487939 [3] https://www.reuters.com/article/us-germany-economy-idUSKBN25T2F5 [4] https://www.dw.com/en/germany-unveils-500-billion-stimulus-plan-modernize-economy-2021-07-08/a-58487939 [5] https://www.reuters.com/article/us-germany-economy-idUSKBN25T2F5 [6] https://www.dw.com/en/germany-unveils-500-billion-stimulus-plan-modernize-economy-2021-07-08/a-58487939 [7] https://www.eybw.de/podcast/ [8] https://www.eybw.de/podcast/ [9] https://www.reuters.com/article/us-germany-economy-idUSKBN25T2F5 [10] https://www.reuters.com/article/us-germany-economy-idUSKBN25T2F5 [11] https://www.bundesbank.de/Redaktion/DE/Pressemitteilungen/2020/07/Pressemitteilung-Zweites-Quartal-2020.html [12] https://www.eybw.de/podcast/
The economic and social policy, which includes the €500 billion fiscal stimulus and infrastructure fund, is aimed at modernizing Germany's economy and boosting growth. However, there are concerns about the long-term effects, particularly the risk of economic zombification and increased insolvencies among struggling companies.
Johannes Mayr, the chief economist at Eyb & Wallwitz, questions the duration of the economic aid, suggesting prolonged aid could lead to increased side effects and potential economic zombification. He advises viewing aid loans with caution to avoid zombie firms proliferating.
