Leopoldina – Corona Pandemic Intensifies Need for Action in German Economic and Social Policy

Crises rarely occur as socially neutral events. As such, the Corona pandemic calls for a focused discussion of the pandemic’s multifaceted medium- and long-term consequences for the distribution of wealth and the persistence of social inequality. Specifically, Leopoldina scholars fear a worsening of income inequality in Germany as a result of the pandemic. While the social security systems largely functioned well during the pandemic, considerable effects on the level and distribution of income are to be expected in the long term. For this reason in particular, the researchers call for concrete action in the area of school education, as educational losses during the crisis threaten to reduce the income potential of the younger generation and – by affecting students from disadvantaged families more severely – to reduce equity of opportunity.

According to the experts of the National Academy of Sciences, the crisis has also made it clearer than ever “how much the economy and society depend on the performance of the state“. In some areas, such as medical supplies, the state has a responsibility to ensure the security of supply for the population through state intervention, as well as in promoting private innovation efforts and knowledge transfer. To improve government performance, the Leopoldina recommends setting up an independent, non-governmental commission once the crisis has subsided – also to address existing deficits.

The pandemic has increased public budget deficits and public debt. Against the backdrop of historically low interest rates, the researchers nevertheless recommend tax incentives for investment and tax relief for companies to further mitigate the negative impact of the pandemic on the economy. In this context, it is important to maintain and strengthen the sustainability of public finances at national and European level in order to have sufficient room for maneuver in the event of another major crisis. The working group recommends weighing up reform options in the context of national and European debt rules on the one hand and government investment activity on the other.

During the crisis, emergency clauses suspended the debt brake and European fiscal rules to ensure sufficient room for fiscal stabilization policies. For the future, it remains to be seen when the invocation of the emergency clauses will end and thus when a return to the normal case of the debt brake can be expected, and whether such a return can be considered reasonable.

According to Leopoldina, the emergency clause of the debt brake should not be terminated too early, as this could jeopardize the support of the economy and hinder the incipient upswing. Rather, the debt brake should be modified to “allow debt financing of net government investment (gross investment minus depreciation)” (Golden Rule). “A well-functioning Golden Rule […] would have to be convincingly linked […] to the establishment of appropriate governance structures, e.g., through the certification of public investments by an independent panel of experts or through the establishment of investment promotion companies that have claims to constant allocations from public budgets,” the scholars said in the statement. The primary goal: to create improved incentives for future investments. Last but not least, the return to normal application of the debt brake would also depend on how quickly and with what success the economy recovers after the crisis.

And at the European level? Currently, the fiscal rules are also suspended there, and this suspension is expected to continue in 2022. According to the Leopoldina, the fundamental question is to what extent the Maastricht requirement of a debt ratio of no more than 60 percent of GDP and the guidelines for debt reduction are still sensible today, since they were incubated in a different macroeconomic environment. According to the researchers, there is a strong case for focusing post-crisis reform discussions on setting realistic fiscal rules with improved incentives to overcome structural weaknesses.