Why are the economies collapsing

Corona crisis: the economy and public finances collapse

The corona crisis tears a deep hole in German state finances. The federal, state, local and social security funds spent 51.6 billion euros more than they received in the first half of the year, as the Federal Statistical Office announced on the basis of preliminary data. In relation to total economic output, the deficit was 3.2 percent. For the first time since 2010, there was a decline in revenue compared to the same period of the previous year. Government spending, on the other hand, increased by 9.3 percent.

The gross domestic product collapsed in the second quarter by 9.7 percent compared to the previous quarter - a little less than expected: In a first estimate, the statisticians assumed a minus of 10.1 percent. In March and April, parts of the German economy had virtually come to a standstill as a result of the pandemic.

Exports and imports are also affected

The situation was similar in many other large economies, which put a massive burden on foreign trade. According to the Wiesbaden authority, exports and imports of goods and services collapsed in the second quarter. Private consumer spending and corporate investment in equipment such as machinery also declined.

Aid package against the recession

Economic output had already fallen slightly at the beginning of the year. Germany, Europe's largest economy, is in a deep recession. After the pandemic began in March, the federal government put together an aid package worth billions. In order to stimulate the economy, it added a 130 billion euro package for 2020 and 2021 in the summer. Among other things, VAT was reduced for six months from July 1: from 19 to 16 percent and from 7 to 5 percent. This should push consumption as an important pillar of the economy.

Because of the Corona crisis, the EU states suspended the rules of the Stability and Growth Pact for the first time, according to which the budget deficit must not exceed three percent and the total debt must not exceed 60 percent of the gross domestic product. Germany last posted a deficit in 2011 as a whole.

Hope for the second half of the year

Economists assume that the economy will pick up speed again in the second half of the year, provided that the number of infections does not rise significantly again. "After the sharp slump in the first half of the year, the German economy should grow very strongly in the summer quarter of 2020," says the latest monthly report from the Deutsche Bundesbank.

Nevertheless, the federal government is expecting the worst recession of the post-war period for the year as a whole. It recently assumed a decline in gross domestic product of 6.3 percent.