The pandemic has posed unprecedented challenges to society and the economy. What is the best way to stop the virus without permanently damaging the economy?



In a nutshell

In January 2020, the novel lung disease COVID-19 became an epidemic in China. Within the space of two months, the World Health Organization had declared it a pandemic, and the global economy was in its grip. As in many other countries, Germany’s public life and parts of its economy shut down for several weeks due to state-imposed contact restrictions. As the lockdown ended and the summer came, the spread of the virus appeared to have all but stopped. But in the fall the pandemic’s second wave inundated Germany; a third wave followed in spring 2021. Of all the areas of the economy affected by the virus, the service sector was hit hardest.

The longer the contact restrictions persisted, the greater their toll on society. In addition to massive government spending on short-time work and emergency aid to companies on the verge of bankruptcy, the restrictions limited participation in education, especially for disadvantaged children and young people, and have dampened the mood of a society cut off from social encounters, family celebrations and cultural life. Since vaccinations began in early 2021, there’s been some light at the end of the tunnel. Nevertheless, Germany will have to live with the virus for many months to come. That is why it needs a strategy that restores normal life and economic activity without letting infection numbers get out of hand. This will require an intelligent combination of vaccinations, testing, and individual responsibility.

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All experts, press releases, publications and events on the Corona crisis

Since the start of the pandemic, IWH economists have carefully studied its economic effects in the short and medium term. They have analysed the pandemic’s development, the measures introduced to slow viral transmission, and the consequences for the economy in Germany, Europe, and the world. Their reports appear in IWH’s quarterly economic forecasts, in the half-yearly joint economic forecasts set up together with the other German economic research institutes, and in the IWH Flash Indicator forecasting the upcoming quarter.

Recently, using a model that describes the relationship between economic mobility and infection rates, IWH researchers estimated that the relaxation of containment measures in March 2021 increased economic mobility in Germany by 10% and the number of infections and deaths by 25% each.

In General, IWH believes that the best economic policy is the successful containment of the pandemic. For instance, its researchers support the government taking on debt to finance state aid during the crisis. But they argue that money should be used to help areas of society and the economy that are actually hurting instead of using it to stimulate general consumption, as with the decision to lower sales tax last year.

Is a wave of bankruptcies imminent?

The bankruptcy rate is a good way to measure the economic impact of the corona crisis. A company’s involuntary exit from the market brings job losses and leaves supplier high and dry, which can induce chain reactions in other companies. A recent IWH Policy Note explains the significance of bankruptcies as an economic indicator and how to measure them with only a short time lag.

In May 2020, shortly after the first corona lockdown, the IWH’s bankruptcy research unit launched the IWH Bankruptcy Update, a well-regarded monthly source of pandemic-related economic information. Two months ahead of official government statistics, it provides and interprets data on bankruptcies in Germany. In the summer 2020, the IWH noted an increase in bankruptcies among large companies. Since then, bankruptcies have remained almost entirely below pre-crisis levels. IWH has not detected a looming wave of bankruptcies in the data, though the true number of insolvent companies may be concealed by state aid and the suspension of the obligation to declare bankruptcy.

Another Policy Note compared bankruptcies in 2020 with the long-term decline in insolvencies that began before the crisis. Based on the relationship of past bankruptcies to short-term economic developments, IWH researchers provided a prognosis of insolvencies in response to the corona shock. They then found that the actual number of bankruptcies was far lower – an indication of the effect of state aid and the suspension of the obligation to file for bankruptcy. The study also showed that most of the bankruptcies were concentrated in industries especially affected by the pandemic.

The crisis has jeopardised financial stability

Unlike the global financial crisis in 2008–2009, which originated in the financial sector and then spilled over into the rest of the economy, the corona crisis directly hits the real economy. Yet if many companies become insolvent due to the crisis, banks can be put at risk. In its June and July 2020 Policy Notes, the IWH pointed to this danger and projected its potential magnitude in various scenarios. It found that even if the economy recovers swiftly – an optimistic assumption – dozens of German banks could face insolvency as a result of loan defaults. Institutions that are particularly vulnerable are cooperative and savings banks that finance hard-hit sectors such as retail and hospitality. In some German regions, many banks were both undercapitalised and held credit portfolios full of borrowers greatly affected by the corona crisis.

When banks are in trouble, the supply of credit for companies starts to run dry, which can trigger a second-order recession. So far, generous government aid for companies has prevented massive credit defaults. But this has produced a growing number of zombie companies that have come to depend on money from the state. At some point, a wave of insolvencies will come. Germany’s banking supervision must work to strengthen the capital base of at-risk banks. Otherwise, the state will once again have to use taxpayers’ money to bail out banks without systematically restructuring their credit portfolios.

We need a new corona strategy

After the first wave of the virus in the spring 2020, IWH President Reint Gropp called for comprehensive testing for the working-age population and protective isolation for risk groups to give people some normalcy again. At that time, a vaccine was not yet in sight. Now, the vaccination campaign is underway, and, together with rapid tests, constitutes a pillar of the pandemic response. State control must eventually give way again to individual responsibility. The lockdown is a blunt instrument and it no longer reflects the needs of the moment. When extended indefinitely, it damages the economy, undermines educational opportunities, increases social inequality, endangers mental health, and erodes trust in democracy.

Publications on the Corona crisis


Epidemics in the Neoclassical and New Keynesian Models

Martin S. Eichenbaum Sergio Rebelo Mathias Trabandt

in: NBER Working Paper, No. 27430, 2020


We analyze the effects of an epidemic in three standard macroeconomic models. We find that the neoclassical model does not rationalize the positive comovement of consumption and investment observed in recessions associated with an epidemic. Introducing monopolistic competition into the neoclassical model remedies this shortcoming even when prices are completely flexible. Finally, sticky prices lead to a larger recession but do not fundamentally alter the predictions of the monopolistic competition model.

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Rekordschulden gegen Corona-Folgen sind finanzierbar – schuldenfinanzierte Konsumstimulierung aber nicht zielführend

Oliver Holtemöller

in: ifo Schnelldienst, No. 8, 2020


Auf große Wirtschaftskrisen reagiert die Finanzpolitik häufig mit einer massiven Ausweitung der öffentlichen Verschuldung, so auch in der gegenwärtigen Coronakrise. In diesem Beitrag wird gezeigt, dass die deutsche Schuldenbremse die Tragfähigkeit der öffentlichen Finanzen auch dann gewährleistet, wenn im Abstand von zehn Jahren Krisen auftreten, in denen die Neuverschuldungsgrenze außer Kraft gesetzt wird. Die Tragfähigkeit zusätzlicher Staatsschulden begründet jedoch nicht deren Sinnhaftigkeit. Diskretionäre Finanzpolitik zur Stimulierung der gesamtwirtschaftlichen Nachfrage leistet insgesamt einen eher kleinen Anteil zur Stabilisierung der realwirtschaftlichen Entwicklung. Maßnahmen zur Eindämmung der Corona-Epidemie, für den Ausgleich tatsächlicher sozialer und wirtschaftlicher Schäden und für die Aufrechterhaltung des Bildungsbetriebs unter den Bedingungen einer Epidemie könnten einen wichtigeren Beitrag zur Krisenbekämpfung leisten als kurzfristige Nachfragestimulierung.

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Konjunktur aktuell: Wirtschaft erholt sich vom Corona-Schock – aber keine schnelle Rückkehr zur alten Normalität

Arbeitskreis Konjunktur des IWH

in: Konjunktur aktuell, No. 3, 2020


Die Corona-Pandemie hat die Weltwirtschaft im ersten Halbjahr 2020 drastisch einbrechen lassen. Im Sommer wurden viele Aktivitäten aber wiederaufgenommen, und ein großer Teil des Einbruchs dürfte im zweiten Halbjahr wieder wettgemacht werden. Einige wirtschaftliche Aktivitäten wie der Tourismus oder Verkehrsdienstleistungen werden allerdings noch eine Weile eingeschränkt bleiben.

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IWH-Flash-Indikator III. Quartal und IV. Quartal 2020

Katja Heinisch Oliver Holtemöller Axel Lindner Birgit Schultz

in: IWH Flash Indicator, No. 3, 2020


Die Corona-Pandemie hat die deutsche Wirtschaft im Frühjahr 2020 in eine tiefe Rezession gerissen. Das Bruttoinlandsprodukt sank im zwei­ten Quartal 2020 um 10,1%, nach einem Rückgang von 2,0% im Quartal zuvor. Dieser massive Wirtschaftseinbruch war insbesondere den Lockdown-Maßnahmen geschuldet, die das öffentliche und wirtschaft­liche Leben zeitweise auf ein Minimum reduzierten. Seit Anfang Mai wurden die Restriktionen zur Eindämmung der Pandemie gelockert, und die wirtschaftlichen Aktivitäten haben wieder deutlich zugenom­men. Der Tiefpunkt der Rezession ist also durchschritten, allerdings dürfte die Rückkehr zum Vorkrisenniveau auch aufgrund der wieder höheren Fallzahlen und der damit verbundenen Unsicherheit noch länger auf sich warten lassen. Die Wirtschaft dürfte im dritten Quartal 2020 um 4,6% und im vierten Quartal dann um 4,0% expandieren. (vgl. Abbildung).

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The Corona Recession and Bank Stress in Germany

Reint E. Gropp Michael Koetter William McShane

in: IWH Online, No. 4, 2020


We conduct stress tests for a large sample of German banks across different recoveries from the Corona recession. We find that, depending on how quickly the economy recovers, between 6% to 28% of banks could become distressed from defaulting corporate borrowers alone. Many of these banks are likely to require regulatory intervention or may even fail. Even in our most optimistic scenario, bank capital ratios decline by nearly 24%. The sum of total loans held by distressed banks could plausibly range from 127 to 624 billion Euros and it may take years before the full extent of this stress is observable. Hence, the current recession could result in an acute contraction in lending to the real economy, thereby worsening the current recession , decelerating the recovery, or perhaps even causing a “double dip” recession. Additionally, we show that the corporate portfolio of savings and cooperative banks is more than five times as exposed to small firms as that of commercial banks and Landesbanken. The preliminary evidence indicates small firms are particularly exposed to the current crisis, which implies that cooperative and savings banks are at especially high risk of becoming distressed. Given that the financial difficulties may seriously impair the recovery from the Covid-19 crisis, the pressure to bail out large parts of the banking system will be strong. Recent research suggests that the long run benefits of largely resisting these pressures may be high and could result in a more efficient economy.

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