Covid-19: German revival, a model for France?

Germany draws first. Berlin unveiled, Wednesday, June 3, what constitutes the first recovery plan in a Europe bruised by the pandemic of Covid-19. Chancellor Angela Merkel said emergency measures to limit the damage should give way to a program that would cost Germany 130 billion euros. It should allow the country to minimize the duration of the looming recession.

"This is a plan of colossal scale, which is equivalent to 4% of German GDP," says Alexandre Baradez, responsible for market analysis for the financial firm IG France, contacted by France 24. In all, the negotiations between the two parties of the government coalition - the conservatives of the CDU and the social democrats of the SPD - have delivered around fifty measures intended to revive activity as quickly as possible.

Less VAT for more consumption

One initiative stands out in particular: the decision to lower VAT by three points until the end of the year. It is a measure which denotes “a change of economic paradigm for Germany”, underlines Céline Antonin, specialist of the German economy at the French Observatory of economic conjunctures (OFCE), contacted by France 24. For a a country which has made budgetary control its signature, thus giving up around 20 billion euros in tax revenue testifies to an evolution in mentalities at the top of the State.

The sharp drop in this indirect tax also illustrates the general philosophy of a plan, which aims above all to boost consumption. Reducing VAT is “a simple and direct way to encourage people to start consuming again quickly,” explains Pascal de Lima, chief economist at Harwell Management financial consultancy, contacted by France 24.

Combined with other measures - such as the payment to each household of 300 euros per child or the extension of support for short-time working - this plan demonstrates "a keen sense of economic timing: after having done everything to avoid the multiplication bankruptcies, the German government is now trying to get companies to start selling again by encouraging consumers to buy their products from them, ”summarizes Alexandre Baradez.

But the bet of a revival by lowering the VAT is no less risky. "We know that during a traditional recession, it is a very effective means of boosting consumption, but the exceptional nature of this health crisis makes the reaction of economic players much more unpredictable," explains the financial analyst from IG. France. Fear of a coronavirus return may push consumers to prefer savings despite spending incentives, while businesses may be tempted not to pass on lower prices to prices to improve their accounts.

France has less room for maneuver

Despite this risk, the three experts interviewed consider the German plan rather well put together. Between the incentives to consume, the investments promised in the energy transition and technological innovations, “it is a balanced plan which addresses immediate needs - that is to say, the revival of consumption - and traces a roadmap for the future ”, summarizes Céline Antonin.

What give ideas to other countries, starting with France? Paris is, in fact, facing a problem similar to Germany: “We talk a lot about the 55 billion euros 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 lever in the hope that the French will buy more baguettes, camembert and Hermès squares…

But “the French budgetary room for maneuver is much less important, and the VAT represents half of the tax revenues of the State”, points out Pascal de Lima. With a public deficit expected at nearly 11% of GDP at the end of the year, Paris can hardly afford the same generosity as Berlin.

However, no need to completely abandon the idea of ​​lowering the VAT for Alexandre Baradez. "We can imagine a sectoral reduction, which would, for example, be limited to catering or hotels," notes the financial analyst.

Political risk

A limited drop in VAT may, however, last a long time. In Germany, Olaf Scholz, the Minister of Finance, justified the generosity of the recovery plan by the desire to strike a blow. The idea is that by not skimping on spending, the Germans would gain confidence, which would encourage them more to consume. Conversely, an overly timid 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 it takes a much stronger signal to change mentalities. A lower incentive could still have a significant effect on consumption in France, ”wants to believe this analyst.

It is, however, evident to the experts interviewed, that Germany is much better equipped to spend more than most European countries. “It is in this kind of situation that we realize the advantage of reducing debt when the world economy is doing well,” summarizes 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 again faster and stronger than elsewhere, the question of competitiveness within the euro zone will arise. This could make some politicians cringe, who will be tempted to say that Germany is always doing better, is not showing solidarity and is taking advantage of the situation, ”fears Alexandre Baradez. Hence, he said, the importance of the European recovery plan, which plans to transfer funds to the countries that need it most. "It is a mechanism that can allow the recovery not to be at multiple speeds," he concludes.

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