Letter from Germany — Health versus Wealth: Dealing with Disease in Deutschland

10 Jul 2020

Because of its comparatively low mortality rate, Germany is often cited as an example of how best to tackle the Covid-19 pandemic. In his latest letter, Michael Burda1 takes a close look at that experience.

Writing from a locked-down university (closed to students, open to faculty) I can report that my family and I are healthy. While we have friends and relatives who have fallen ill, they have all recovered. Covid-19 has changed my work forever, in particular the way I teach, possibly for the better; unfortunately it has also changed interpersonal relationships in ways not completely understood. I am sure this is a universal constant across the world. I simply can’t imagine how much more difficult it would be for my students had all lectures, seminars, office hours and other meetings been cancelled, for months on end. Zoom has saved us and our profession in a very important way. We are among the lucky ones. I am less sure about universities as institutions.

Pandemics as political events

Because large-scale pandemics largely spared us for so many decades, it was difficult to anticipate how economic and political they necessarily can be. This has been especially true in Germany, where the liberal order (in the European sense) is continually under low-level siege. Even though the health system works and was well-prepared, concerns about inequality of outcome are elevated, and for good reasons. Even if individuals faced similar risks in terms of loss of life or longevity, that loss is increasingly unequal in monetary value in ways that are unpleasant to discuss, even for economists. Capitalists have the most to lose if there are no workers to work in their factories or purchase their output. Workers can ‘only’ lose their lives. Wealthy individuals may have accumulated assets and purchasing power, but their ability to deploy those assets depends on the functioning of the remainder of the economy and its willingness to ‘cooperate’. It is striking that governments around the world were quick to define certain services and production as essential, in particular those that pay low wages. I am reminded of the landed gentry in mid-14th century England forcing farm labor to return to the fields despite the Black Death raging all around. In a modern setting, complementarity seems to extend to the functioning of state and, in the case of Germany, to the nations of the European Union. Ultimately, this might be why Germany will bail out Italy and Spain — because it must. And the pandemic could well have started in Munich rather than in Bergamo.

Germany did well...

Germans are evidently proud of their recent success in keeping the incidence of Covid-19 and the death rate low and ‘flattening the curve’. The mortality to date (mid-June 2020) attributable to the corona pandemic has been 106 per million inhabitants, compared with 353 in the US, 453 in France, 489 in Sweden and 622 in the UK (just for the record: Cuba, Australia, and New Zealand are much lower!).  But the economic price of success has been high, with Germany now facing a recession of magnitude greater than the Great Recession. The government is predicting a GDP decline of 6.3 per cent averaged over the entire year (the Eurozone is looking at 7.5 per cent decline); private estimates range are ‘catastrophic’ and as high as 15 per cent. Unemployment remains low at the time of this writing (about 6.5 per cent) because more than seven million workers are on Kurzarbeit — the state-subsidized short-time work program at 2/3 of previous pay, eligible when more than 10 per cent of a firm’s staff has more than 10 per cent underutilization. Since Kurzarbeit is supposed to be ‘kurz’ (currently 12 months), a political decision will be due on an extension at public expense (when the social security fund for short-time work has dried up). Unemployment stands to skyrocket unless the economy recovers in the meantime. A small surplus in the government overall budget has evaporated, with new debt issuance reaching possibly 10 per cent of GDP this year.

...but why?

How did the Germans keep the rate of infection and spread so low, what did they do right? Was it banning public gatherings? Closing schools? Imposing a lockdown? Shutting borders?  Wearing masks? Testing? Contact tracing? Obeying the rules? An open source contact app only just introduced a few days ago? To me, acting early and decisively was crucial, as was the case with Greece, Iceland, and the Czech Republic. In her inimitably solemn fashion, Chancellor Merkel declared publicly that the corona virus was a serious problem, that 2/3 of the population might ultimately get it, and that thousands, possibly hundreds of thousands, could die. In doing this, she shocked the public into keeping distance, staying clear of public gatherings, etc., long before the official lockdown on March 22 that has since devastated large swathes of retail trade, hotel and restaurants, and personal service sectors. Images of Wuhan and northern Italy arrived early enough to galvanize politicians into a preemptive expansion of intensive care capacities, retooling production towards intensive care equipment, and outsourcing of personal protection gear. With Europe facing a 25 per cent decline in exports, it is to be expected that Germany will be particularly hard-hit; in April exports were already estimated to have declined by 30 per cent.

Old habits die hard

In spite of corona, the strength of German habits are remarkable. One of them is beer. Another is football. Due to the lockdown, the former has boomed; the latter has not. The resumption of the Bundesliga season on May 16 was largely unquestioned and attracted much international attention. The bizarre spectacle of ‘ghost games’ (Geisterspiele) in empty stadiums is testimony to how business interests can trump health and safety. Another possibly less familiar tradition to my UK friends is white asparagus, that white vegetable that requires highly labor-intensive cultivation and harvesting. Eating asparagus in May has the status of a sacred ritual in this country, and I myself partake of this delicacy 5-10 times each spring. In order to save the season, 80,000 workers were flown in from Poland, Romania and elsewhere, with the dispensation of the relevant governments, long before EU borders were officially reopened. Equally indomitable is the country’s taste for cheap meat. At the moment, a controversy is raging surrounding recent severe outbreaks of coronavirus at slaughterhouses that employ tens of thousands of Eastern Europeans and house them in embarrassingly cramped quarters (a great example of monopsony behavior for my students!) Tourism is another perennial favorite — and 11,000 tourists are travelling to Mallorca and other Balearic islands in a ‘pilot project’ to see if they can behave according to the new hygienic standards. Lacking their British competitors, I am sure there will be sufficient deckchairs to relegate the proverbial battle of the oversized bath towels to the dustbin this year.

As always, the underlying discussion is health versus wealth. The dramatic decline in stock prices showed to what extent fear ruled expectations — yet after a concerted fiscal stimulus, stock prices have recovered somewhat. Yet in the end: cui bono? Whose jobs, whose wealth? The case of Lufthansa, the German flagship airline, is indicative. The collapse of global travel  to 5 per cent of its pre-February levels, was a death knell to the company as it was organized. Survival was only possible after a EUR 9 billion cash-and-capital infusion, with the government taking a 20 per cent stake. Shortly afterwards, management announced across-the-board job cuts of 20 per cent. The natural question is: Who got bailed out? The shareholders? The workers? The airports?  Germany has faced the same debate plaguing every other advanced economy, especially in light of the impending recession: Was all the economic devastation necessary?  The German population was already so struck by the tragedy of Italy that by mid-March the ‘basis reproduction rate’ R in Germany (the number of new infections caused on average by a sick person) had fallen below 1, even before the lockdown was announced. As in Britain, world-renowned virologists and epidemiologists were excoriated in the tabloid press for their power over policymakers and without regard for economic consequences. The battle for airtime between science and economics is ubiquitous. Throughout is the implicit or sometimes explicit question: What is the value of a human life? Should this value depend on age? Should it depend on social status? What are the opportunity costs?

The EU and Brexit

I will close with a thought about the EU and Brexit. To my mind, the value of the European Union could never be so clear as now, although its incompetence in conveying that value has never been so evident. Pandemics are the most obvious example of Pigou’s externality, and cooperation among EU countries could have avoided the use of border closures to restrict mobility of the population — with enormous collateral economic damage to unaffected areas. A centralized, coordinated yet flexible reaction to disease outbreak would be more effective; the proper response should not be country-but localized measures to isolate the sick, test the infected, and trace past contacts. In a world with porous national borders, health policy must transcend them. This would be the function of a European Pandemic Authority. Still grasping for a positive analysis of European integration, I have yet to understand why nations of the Europe cannot recognize and acknowledge these advantages. And isn’t Brexit a particularly bad idea now?

Be safe, best regards from Berlin,

Michael Burda

Note:

1. Humboldt University, Berlin