Frankfurt – Main – empty streets, closed shops, the slowdown in production: the corona pandemic paralyzes public life and hits the economy with full force. Is the crisis more devastating than the 2008/2009 slump?
Again and again, parallels are drawn to the financial crisis – even if most people’s lives at that time were still as usual.
“”The costs are expected to exceed everything that has been known from economic crises or natural disasters in Germany in recent decades,” said the President of the Ifo Institute, Clemens Fuest, about the current situation. The head of Munich Airport Jost Lammers stated: “The effects of the corona crisis are more massive than the consequences of the attacks of September 11, 2001, or the global financial crisis of 2008.”
And the head of the state development bank KfW, Gunther Braunig, said: It is now foreseeable that “the extent of the crisis will go far beyond what we know from the financial crisis”.
Are there parallels between 2020 and the financial crisis? Or is the comparison limping? A classification:
CAUSES: Unlike the current virus-induced crisis, the financial crisis originated in the global banking network – and lax rules. It was only over the years that financial houses financed houses and apartments for tens of thousands of Americans – even those who could not afford to live on their feet. The badly secured loans – so-called subprime mortgages – bundled resourceful financial jugglers into packages and sold them on a large scale. Because rating agencies ennobled the opaque securities with top grades, nobody soon became interested in their risky content.
The bubble burst when many borrowers could no longer pay their installments. What looked like a problem limited to the USA in the spring of 2007 grew into a global banking crisis at the latest when the US investment bank Lehman Brothers went bankrupt on September 15, 2008. Banks had to cope with billions in losses, confidence in business partners eroded, and a number of institutes were saved from the collapse with tax billions.
REACTIONS: The upheavals in the financial system hit the global economy hard, almost all economies around the world plunged into recession in 2009, and economic output in Germany shrank by 5.7 percent. The years from 2010 became an ordeal for the still young euro area. Because political recipes were initially lacking, central bankers became the “heroes of the crisis”, as the current ECB president and then IMF chief Christine Lagarde put it in 2014.
The US Fed, European Central Bank (ECB) and other central banks cut interest rates drastically and pumped billions into the markets to prevent the drying up of the global cash flows that are so important for businesses and consumers.
Politicians tried to fill gaps in the supervision of banks and to tighten stricter rules internationally. But that lasted. After all, much of what was started after the financial crisis has proven to be a solid foundation in the Corona crisis. For example, banks have to show significantly more equity capital that they can use to buffer losses in a crisis. The ECB monitors the large banks in the euro area centrally and if it is necessary to wind up a dilapidated bank, there are now European rules for this. For states, the Europeans pulled in the ESM euro bailout fund as a rescue network, and central banks now have plenty of experience with emergency measures such as bond purchases.
INTERNATIONAL COOPERATION: The financial crisis catapulted the G20 – the group of large industrialized and emerging countries – into the central forum for economic cooperation. In 2008, the heads of state and government of the G20 met for the first time and coordinated their approach. Since the financial crisis, this format has shown “that together we can better solve global economic problems and promote development everywhere,” said Chancellor Angela Merkel.
The fight against the coronavirus pandemic started slowly. Even within the European Union, states single-handedly closed borders. “At first we looked into the abyss,” said EU Commission President Ursula von der Leyen. Meanwhile, Eurozone finance ministers are working flat out on a rescue package for EU countries. Von der Leyen promises aid in the billions. There is still controversy about the right instruments.
And the G20 leaders recently decided to act together. This is anything but easy – also because US President Donald Trump has been pursuing the America First strategy since taking office and accuses Chinese and Europeans. Tensions among the G20 partners – including Turkey, Saudi Arabia, Brazil, and Russia – have recently increased.
GOVERNMENT DEBT: Economic stimulus programs and rescue billions for banks in the financial crisis have already caused huge government debt to continue to grow – a problem especially for the weaker euro economies. They had to pay higher and higher interest rates to get fresh money on the capital market, which further increased the debt. International aid programs have been launched for Greece, Portugal, Ireland, and Cyprus – each against strict reform and austerity requirements imposed by donors.
Even in the Corona crisis, government debt will rise in the face of billion-dollar rescue packages, higher spending on rising unemployment and falling tax revenues. “In the current year, government debt will increase sharply in view of the coronavirus pandemic,” the Bundesbank expects for Germany. But there is a crucial difference to the financial crisis: the central bank’s fire from all tubes. The ECB’s government bond purchases ensured highly indebted euro countries access to the capital market, argues Commerzbank chief economist Jorg Kramer.
DURATION: The financial crisis was creeping in. Even after the new lung disease became known in China earlier this year, there was initially hope that it would remain regionally limited. For example, US Federal Reserve Chairman Jerome Powell was still “cautiously optimistic” at the end of January with regard to global growth.
In retrospect, there is hope for the rapid recovery of the German economy after the severe economic downturn in 2009: only one year later, Europe’s largest economy made an impressive return, followed by a ten-year upswing. Economists currently expect a similar development: The German economy is likely to grow again next year because the crisis is affecting an essentially healthy economy. The economist Volker Wieland sums it up like this: “It is not like a war when the capital stock would be bombed and the workers on the front line.”