German revival, a model for France?

Berlin announced on Wednesday a stimulus package of 130 billion euros. Germany thus becomes the first European country to switch to a program to support the resumption of operations following a first series of emergency measures to save the economy. An ambitious plan that could inspire other European countries?

Germany draws first. Berlin on Wednesday, June 3, presented what constitutes the first recovery plan in a Europe crushed by the Covid-19 pandemic. Chancellor Angela Merkel said emergency measures to mitigate the damage should give way to a program that would cost Germany $ 130 billion. It must enable the country to minimize the duration of the ongoing recession.

“This is a colossal scale plan, equivalent to 4% of German GDP,” said Alexandre Baradez, head of market analysis for the financial company IG France, contacted by France 24. Overall, the negotiations between the two parties in the government coalition – the Conservative of the CDU and the Social Democrats in the SPD – born about fifty measures intended to revive the activity as quickly as possible.

Less VAT for more consumption

One initiative stands out in particular: the decision to reduce VAT by three points until the end of the year. It is a measure that denotes “a paradigm economic for Germany ”, emphasizes Céline Antonin, specialist of the German economy at the French Economic Economic Observatory (OFCE), contacted by France 24. For a country that has made the budget control its signature, and therefore waive about € 20 billion in tax revenue testify on the development of mentalities at the top of the state.

The sharp fall in this indirect tax also illustrates the general philosophy of a plan, which is primarily aimed at increasing consumption. Reducing VAT is “a simple and direct way to encourage people to start consuming quickly,” explains Pascal de Lima, chief economist at Harwell Management’s financial consultations, contacted by France 24.

Combined with other measures – such as payment to each household of € 300 per child or extension of short-term support – this plan shows “a sharp sense of financial timing: after doing everything to avoid the multiplication in bankruptcy, the German government is looking now for companies that start selling again by encouraging consumers to buy their products from them, ”concludes Alexandre Baradez.

But investing in a revival by lowering VAT is no less risky. “We know that during a traditional recession it is a very effective way to increase consumption, but the exceptional nature of this health crisis makes the reaction of economic operators much more unpredictable,” explains the financial analyst from IG. France. Fear of returning to the coronavirus may lead to consumers preferring savings despite spending incentives, while companies may be tempted not to pass on the reduced VAT rates to improve their accounts.

France has less leeway

Despite this risk, the three experts interviewed believe that the German plan is quite well composed. Between the incentives to consume, the investments promised in the energy transition and technological innovations, “it is a balanced plan that meets immediate needs – that is, the resuscitation of consumption – and traces a roadmap for the future,” concludes Céline Antonin.

What gives ideas to other countries, with France? Paris is actually facing a problem similar to Germany: “We talk a lot about the € 55 billion saved by the French since the start of the crisis and the means to mobilize them to revive the economy,” recalls Céline Antonin. The French government could also use the VAT levy in the hope that the French would buy more baguettes, camembert and Hermès boxes …

But “the French budget space is much less important, and VAT is half of the state’s tax revenue,” recalls Pascal de Lima. With a public deficit expected to be close to 11% of GDP by the end of the year, Paris can hardly afford the same generosity as Berlin.

Don’t worry, though, about abandoning the idea of ​​lowering VAT for Alexandre Baradez. “You can imagine a sector decline, which for example would be limited to catering or hotels,” notes financial analysts.

Political risk

However, a limited reduction in VAT can take a long time. In Germany, Olaf Scholz, the finance minister, motivated the generosity in the stimulus plan through the desire to strike a blow. The idea is that the Germans, by not glancing at the expenditure, would gain confidence, which would encourage them more to consume. Conversely, an overly modest plan would leave consumers indifferent.

For Alexandre Baradez, we must take into account the differences in economic behavior between the French and the Germans. The latter ‘are more focused on savings, and a much stronger signal is needed to change their mindset. A lower incentive can still have a significant effect on consumption in France, “this analyst believes.

However, it is obvious to the interviewed experts that Germany is much better equipped to spend more than most European countries. “It is in this kind of situation that you realize the benefit of reducing your debt when the world economy is doing well,” says Céline Antonin.

The German plan, as attractive as it may seem, probably cannot be copied identically elsewhere. This poses a political problem: “The risk is that if the German machine starts up again faster and stronger than elsewhere, the question of competitiveness in the euro area will arise. This may cause some politicians to crawl, who will be tempted to say that Germany always performs better, does not show solidarity and exploits the situation, “fears Alexandre Baradez. Therefore, he said, the importance of the European Recovery Plan, which plans to transfer funds to the countries that need it most. “It’s a mechanism that can allow recovery not to happen at multiple speeds,” he said.