Restart and Recovery

POSITION | ECONOMIC POLICY | COVID-19

Restart and Recovery Scenarios and Economic Policy Measures

28 April 2020 Executive Summary The coronavirus pandemic is a deep cut for the international community and their economies. The Federal Government has demonstrated its ability to act. In times of crisis, the primacy of politics applies more than ever. This also applies to the development of a framework for the phasing out of quarantine measures and for an economic recovery phase.

German industry - listed corporations and small or medium-sized family businesses alike - has mostly been able to maintain production and services under difficult conditions. Current developments in the course of the pandemic are now showing first signs of easing. Health comes first, the integrity of people has absolute priority. The goal must be a binding planning horizon for businesses. If we do not succeed in gradually lifting the lockdown of the economy and society in the near future, there are considerable consequences for our businesses and their workforces, customers and suppliers. BDI is advocating that an economic policy perspective of the crisis with its medium and long-term consequences should increasingly be taken into consideration.

Economic policy must succeed in cushioning the recession, while the extent of which cannot yet be conclusively assessed. Moreover, after a phase of unavoidably high state involvement, economic policy must pave the path to new growth through entrepreneurial investment and innovation. Once the virus has been contained by the hygienic standards now in place, it is important to get economic activity back on track as quickly as possible, especially in the manufacturing sector, to restore transport and logistics chains and to coordinate this closely at the European level.

For the stabilisation and recovery phase, targeted impulses allowing for a stronger demand for goods and services from private households and for relief for businesses are needed throughout Europe in order to regain momentum. Tax relief, public spending and medium-term growth stimuli for climate protection and digitisation must be sufficiently dimensioned to put Europe back on a growth path.

For the German industry, the restart at the beginning poses the enormous challenge of reactivating its value-added networks, which have been partially disrupted and torn apart during the crisis and which are generally linked internationally and EU-wide. The reactivation of industrial production networks is the very domain of entrepreneurial action and requires no further state coordination apart from a reliable planning framework by politicians. The basic prerequisite for ambitious climate protection is also a high investment capacity and willingness on the part of consumers, businesses and states. It must be

Strategic planning and coordination | T: +49 30 2028-1629 | m.kraemer@bdi.eu | www.bdi.eu

Restart and Recovery

weighed up very carefully at the national and the European level how the necessities of reconstruction can be brought into a good balance with the political objectives of climate protection.

Best practices from individual countries include extensive creation and expansion of testing capacities in order to provide certainty to all people suspected of having a coronavirus infection and at the same time create a reliable database for political decisions. The widespread use of traceability apps with a temporary use of mobile phone data as well as a broad acceptance of face masks in public places should also be mentioned here.

Artificial classifications into supposedly systemically relevant and non-systemically relevant industries are misleading; the revival of industrial production networks is the real challenge. Their efficient interaction is what makes large parts of our industry competitive. What is needed is a reorientation towards the regulatory principles of our social market economy, which, even in crises, sets limits to the state as an active participant in the market economy.

During the containment phase, national priorities are to provide the best possible protection for businesses and employees from severe disruptive distortions. Comprehensive federal programmes and supplementary programmes of the Länder (federal states) and the EU are available for this purpose.

The effectiveness and appropriateness of which must be continuously reviewed.

State participations under the “Wirtschaftsstabilisierungsfondsgesetz� (Economic Stabilisation Fund Act) should be used for a limited period of time and always only as a last resort in order to protect companies from insolvency due to this crisis.

Especially in the field of energy and climate policy, there are numerous reporting deadlines or consumption thresholds. The compliance with which, or the achievement of which is essential for granting important cost reductions, especially for energy-intensive companies. Without these reductions, there is an immediate threat of insolvency. For this reason, a legally binding regulation is quickly needed for centralised relief measures, which will prevent the loss of relief due to the crisis.

Once the pandemic has been contained to an acceptable level, there will be a phase of re-entry lasting several months. During this phase areas of public life and economic activity will gradually be re-admitted, possibly interrupted by regional, sectoral or national containment measures in the event of relapses. In this phase, industry is faced with the manageable challenge of organising industrial production with occupational health and safety measures that will take account of the continuing risk of infection within companies. Categorically preventing new infections in the operational environment is the top priority in this phase. Serious relapses render any other support measures useless. This re-entry will come to an end at the latest when vaccines and effective medicines become available - hopefully in the course of 2021.

During this period, trade and industrial production will particularly be resumed, ramped up or normalised, although on the demand side the expected global recession means that an immediate return to pre-crisis levels cannot be expected. In this phase of re-entry, the industry faces the challenge of organizing industrial production with tighter occupational safety and health standards. The categorical premise for all the support and flanking measures described below is the prevention of relevant numbers of new infections within companies. A further shutdown would have unforeseeable consequences.

In the re-entry phase, priority will continue to be given to issues of supporting the economy through liquidity and equity assistance. Economic policy flanking measures cannot draw on the full extent of the available resources during this phase, as there will still be supply problems. It makes sense to pay particular attention to restoring certain process chains in badly affected sectors, where industrial activity, certain services and an efficient administration must work together. This applies, for example, to

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the production of motor vehicles, the opening of car dealerships and the activities of registration offices in order to re-launch the automotive value chain.

The volume of economic stimuli at the national level cannot yet be set high in the re-entry phase, as the economy still has supply constraints. They can, however, already be decided politically in a steplike structure and designed in such a way that later ignition stages can be identified in advance when normal business conditions are restored and can then be easily implemented.

The phase of re-entry, probably starting in the first quarter of 2021, should be followed by a short phase of stabilisation of one to a maximum of two quarters, during which the restrictions on public life can be largely lifted and economic activity can domestically take place largely undisturbed. During this phase, businesses will still have to contend with weak global demand, especially German industry. Financing problems will persist. In macroeconomic terms, a recovery to the level of economic activity before the crisis will probably not be achieved until 2021 at the earliest, and possibly not until 2022.

In this phase, national economic policy can be flanked by investment incentives for private businesses.

Examples are depreciation regulations, lower tax rates as well as faster approval procedures and acceleration of planning and authorisation procedures, faster implementation of public investments, temporarily lower income tax burdens and a temporary reduction of the VAT rate.

In some sectors, a dip in demand over several years compared with the pre-crisis period is to be expected. The recovery on the labour market is typically delayed and, depending on the size of the collapse, is likely to take several years throughout Europe.

In this phase, there is also a need for measures of a longer-term nature which come along the growth programme. These include increasing public investment, improving infrastructure, reducing the tax burden on businesses, providing more support for research and technical progress and implementing the National Industrial Strategy 2030, as well as pursuing an ambitious industrial and digital strategy in the EU. The integration of the four EU dossiers "Green Deal", "Digitisation", "Industrial Strategy" and "Sustainable Finance" into the design of the recovery programme must be well coordinated. The national implementation of the individual policy areas must in turn be consistent with the EU initiatives.

Cross-border trade and investment in the recovery phase will need to be stimulated by trade facilitation and confidence-building measures such as reliable international rules. Neither the German government nor the EU should press ahead with the restructuring of value chains ex officio. Businesses are able to bring more resilience to their supply chains and value chains on their own in order to cushion vulnerabilities through greater diversification.

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Table of Contents Executive Summary ............................................................................................................................ 1 Foreword .............................................................................................................................................. 5 Distinction of Four Phases ................................................................................................................. 7 Phase 1: Containment......................................................................................................................... 8 General Economic Policy Requirements ............................................................................................... 8 Phase 2: Re-entry ................................................................................................................................ 9 General Economic Policy Measures ..................................................................................................... 9 Specific Economic Policy Measures ................................................................................................... 11 Phase 3: Stabilisation ....................................................................................................................... 16 General Economic Policy Measures ................................................................................................... 16 Specific Economic Policy Measures ................................................................................................... 16 Phase 4: Recovery ............................................................................................................................ 19 General Economic Policy Measures ................................................................................................... 19 Initiation of a Growth Programme ....................................................................................................... 20 Imprint ................................................................................................................................................ 23

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Foreword The Federal Government has demonstrated its ability to act in crisis mode. This applies both to the speed of decision-making and to the scope of the measures taken. In times of crisis, the primacy of politics applies more than ever. This also applies to the development of a framework for the phasing out of quarantine measures and for an economic recovery phase. The goal must be a reliable planning horizon for all businesses in Germany. This requires a uniform approach across all countries, especially within the Federal Republic. In many fields, a coordinated approach is imperative in Europe.

Once the virus has been contained by the hygienic standards now in place, it is important to get economic activity back on track as quickly as possible, especially in the manufacturing sector, to restore transport and logistics chains and to coordinate this closely at the European level. Yet, it is important to emphasise the principle of individual responsibility in the economy here. In compliance with the usual health precautions, the opening of shops will also be possible and necessary.

For a short period of stabilisation and a longer recovery phase, targeted impulses allowing for a stronger demand for goods and services from private households and for relief for businesses are needed throughout Europe in order to regain momentum. Tax relief, public spending and medium-term growth stimuli for climate protection and digitization must be sufficiently dimensioned to put Europe back on a growth path.

For the German industry - listed corporation and small or medium-sized family business alike -, the enormous challenge for the restart at the beginning is to reactivate their value-added networks, which have been partially disrupted and torn apart during the crisis and which are generally linked internationally and EU-wide. The actual competitiveness of large parts of German and European industry lies in their efficient interaction. The reactivation of industrial production networks consequently is the very domain of entrepreneurial action and requires no further state coordination apart from a reliable planning framework by politicians. The health policy framework that forms the gradual return to normality for the economy and society must be established quickly.

Restoring the confidence of consumers and customers is no less important. The opening of outlets (shops and traders) and economic policy incentives for consumers are an important prerequisite for production and sales in all sectors to return to pre-crisis levels.

The basic prerequisite for ambitious climate protection is also a high investment capacity and willingness on the part of consumers, businesses and states. This will be severely limited by the pandemic. Therefore, it must be weighed up very carefully at the national and the European level how the necessities of reconstruction can be brought into a good balance with the political goals of climate protection. There may be opportunities for an accelerated switch to more sustainable technologies, but there may also be constraints to stretch planned processes over time.

The Asia-Pacific region was affected by the pandemic several weeks earlier than the rest of the world.

The experience of countries that have successfully initiated a re-start so far is useful. Indicators for the re-start phase are particularly provided by those areas that have only marginally restricted public life but have nevertheless been able to keep the number of cases of Covid-19 disease comparatively low.

This offers valuable experience for Germany and Europe, especially since there are many German and European businesses that have gained practical experience at their Asian production sites, which they can now bring to our national planning.

Best practices from individual countries include the extensive creation and expansion of testing capacities in order to provide certainty to all people suspected of having a coronavirus infection and at the

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same time create a reliable database for political decisions. The widespread use of traceability apps with a temporary use of mobile phone data as well as a broad acceptance of face masks in public places should also be mentioned here. In particular, the costs for a comprehensive and statistically significant sample by means of large-scale tests are ultimately likely to be lower than the overall economic damage caused by a prolonged shutdown of public life.

Politics and economy must be in close communication about the boundary conditions of a new start and define the sensible need for economic policy support. Artificial divisions into supposedly systematically relevant and non-systematically relevant sectors are misleading; the revival of industrial production networks is the real challenge. Their efficient interaction is what makes large parts of our industry competitive. What is needed is a reorientation towards the regulatory principles of our social market economy, which, even in crises, sets limits to the state as an active participant in the market economy.

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Distinction of Four Phases Which phases can be distinguished when considering economic consequences of the pandemic? 

It can be assumed that after an acceptable containment of the pandemic, there will be a phase of re-entry lasting several months. Areas of public life and economic activity will then gradually be readmitted, possibly interrupted by regional, sectoral or national containment measures in case of relapses.

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This phase of re-entry will end at the latest when vaccines and effective medicines become available. This will hopefully happen during 2021. During this period, trade and industrial production will particularly be resumed, ramped up or normalised, although on the demand side the expected global recession means that an immediate return to pre-crisis levels cannot be expected. In this phase, obstacles to cross-border logistics and goods traffic must still be expected. The industry faces the manageable challenge of organising industrial production with effective occupational safety and health measures that take account of the continuing risk of infection within companies.

The categorical prevention of new infections in the operational environment is the top priority in this phase. Serious relapses render any other support measures useless.

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This is likely to be followed by a short period of stabilisation of one to two quarters at most, during which restrictions on public life will be largely lifted and economic activity will be largely undisturbed domestically. Yet, international disturbances will still be considerable.

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A recovery to the old level of pre-crisis economic activity will probably be achieved in the course of 2021 at the earliest, and possibly rather in 2022. In some sectors, a dip in demand over several years compared with the pre-crisis period is to be expected. The consumer goods sectors are likely to recover somewhat more quickly if the slumps in income and employment can be corrected quickly. The recovery on the labour market is typically delayed and, depending on the size of the slump, is likely to take several years over the next few quarters throughout Europe. This has a permanent dampening effect on private consumption and the demand for consumer goods.

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Phase 1: Containment General Economic Policy Requirements 

Provision of liquidity support: In the containment phase, national priority is to provide the best possible protection for businesses and employees from severe disruptive distortions. Comprehensive federal programmes and supplementary programmes of the Länder and the EU are available for this purpose. The effectiveness and appropriateness of which must be continuously reviewed.

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State involvement must always be the last resort: During the containment phase or shortly thereafter, decisions on state involvement will have to be taken under the “Wirtschaftsstabilisierungsfondsgesetz” (Economic Stabilisation Fund Act). This activity should be limited in time and always used only as a last resort in order to protect businesses from insolvency due to a crisis.

From a regulatory point of view, state holding in private companies should be limited in quantity and time.

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Stand-still and roll-back agreements required: World trade will experience a massive decline; the World Trade Organization expects a decline of 13 to 32 percent this year, depending on the length of the containment periods in the major economies. In addition to production losses caused by employee illness and a shutdown of production due to infection control measures, there are increasingly national export restrictions. Although the European Commission has decided to withdraw some of the existing restrictions, the EU is still in the process of implementing them. However, an approval requirement for face masks remains in place and is to be monitored and coordinated at the European level. In general, such export restrictions not only restrict production and sales, but also send a devastating signal and cause domino effects in other countries. Just-in-time production has become impossible in the current situation. Stocks are being built up on a scale that previously existed little or not at all. Businesses need to restrict their activities more and more, especially in logistics. Therefore, immediate and effective standstill and roll-back agreements regarding trade-restrictive measures at the international level are necessary. This must extend well beyond the circle of the G20 countries.

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Supposed systemic relevance as a criterion should be avoided at all costs: In addition, there are distortions in the global value chains and production networks that result from the distinction between supposedly systemically relevant and non-systemically relevant branches of production and services in numerous countries. In some countries, for example, exporters must provide evidence that exported goods will be used in essential branches of production / within products in the buyer country. There is a patchwork of different definitions and regulations worldwide. The resulting legal chaos, combined with considerable lack of transparency, leads to enormous legal uncertainty for companies and a massive amount of bureaucracy, which further hampers trade. The G20 countries should commit themselves to repeal these regulations as soon as possible.

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Short-term regulations on central deadlines for cost reductions: Especially in the field of energy and climate policy, there are numerous reporting deadlines or consumption thresholds. The compliance with which, or the achievement of which is essential for granting important cost reductions, especially for energy-intensive companies. Without these reliefs, there is an immediate threat of insolvency. If reliefs become uncertain, this should partly already be included in the quarterly report in June. For this reason, a legally binding regulation is needed quickly for centralised relief measures, which will prevent the loss of relief due to the crisis. This applies, above all, to the EEG (German Renewable Energy Sources Act) Special Equalisation Scheme and to the relief of grid charges under § 19 II of the “Stromnetzentgeltverordnung” (regulation governing energy grid charges).

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Phase 2: Re-entry Once the pandemic has been contained to an acceptable level, there will be a phase of re-entry lasting several months. During this phase areas of public life and economic activity will gradually be re-admitted, possibly interrupted by regional, sectoral or national containment measures in the event of relapses. This re-entry will end at the latest when vaccines and effective medicines become available.

This will hopefully happen during 2021. During that time, trade and particularly industrial production will be resumed, ramped up or normalised. On the demand side, however, an immediate return to precrisis levels is not expected due to the expected global recession. In this phase, obstacles to crossborder logistics and goods traffic must still be considered. The industry faces the manageable challenge of organising industrial production with tighter health and safety regulations.

General Economic Policy Measures 

Resumption of industrial activity while keeping numbers of new infections low: The categorical premise for all the following support and accompanying measures is the prevention of relevant numbers of new infections on business premises. A further shutdown would have unforeseeable consequences. All proven instruments of technical occupational health regulations must be used for this purpose. Businesses can immediately rely here on experiences from decades of successful health protection at the workplace. Support and advice from accident insurance agencies and from authorities dealing with the new risk situation are available and experience high acceptance. In accordance with the experience now to be gained, these concepts must be constantly updated for the requirements of all sectors. New technical solutions - e.g. a monitoring and rapid test procedure for employees that is independent of any public authorities - should be financially supported and state-of-the-art solutions should be quickly brought into broad implementation.

Official responsibilities, reporting channels and emergency procedures should also be clearly regulated.

The effectiveness of occupational health and safety measures depends to a large extent on the protective equipment available, such as face masks and protective gloves. Here, industry and politics have a joint responsibility to cover the foreseeable steep rise in demand beyond the health sector.

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Gradual return to production: In the re-entry phase, priority will continue to be given to measures to support the economy by means of liquidity and equity assistance. In many sectors of the economy, however, a gradual opening of shops and normalisation of work in businesses will be possible. This will also be the chance for self-employed people and companies to generate sales and earnings. For industrial value creation, a gradual return to production will be possible even where it has been interrupted in the past, albeit with health precautions and certain restrictions in the production process.

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Absence of major events: Major cultural and sporting events, trade fairs and congresses should not be possible at this stage. Corresponding restrictions for such economic activities are therefore likely.

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Impacts on demand and supply shortages: In industrial production, demand is expected to be impaired and, over a period of several weeks, supply bottlenecks (insolvencies, disruptions in logistics) may occur in the automotive and aviation value chains in particular, and to a lesser extent in the capital goods manufacturers, including mechanical engineering. The extent of these bottlenecks depends primarily on the restoration of European and non-European value chains.

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Return to open educational institutions: At this stage, there should be a gradual return to open educational institutions. This is an important step towards normal working life for the self-employed and employees.

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Strengthen supplier relationships: The relationship between large companies and suppliers will be partly characterised by tensions. This is not only a matter for politics, but also for intra-industrial cooperation and for fairness in supply chains. The crisis mode of the recent months has put supplier relations to a severe test. We must quickly find our way back to normality.

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Stabilise confidence among employees and consumers: Economic policy cannot yet draw on the full potential at this stage because there will still be supply problems. To this extent, general demand instruments, such as temporarily higher government spending and other measures to support the economy (including procurement, faster implementation of investment projects, extension or temporary freeze of insolvency regulations and rebalancing of balance sheets, further exceptions to strict EU state aid regulations) as well as temporary reductions in tax rates (turnover, income, corporation and trade tax) are already possible, but cannot yet be fully implemented. In this phase, it is mainly important to stabilise confidence among employees and consumers with regard to their earning prospects (employment, exit from short-time work, income development) and to offer companies prospects for a recovery in sales. Government measures can contribute to this.

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Restore industrial process chains: In this phase, it is also useful to pay special attention to the restoration of certain process chains in severely affected industries, where industrial activity, certain services and an efficient administration must work together. This applies, for example, to the production of motor vehicles, the opening of car dealerships and the activities of registration offices, because all elements are needed to re-launch the automotive value chain.

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Prepare economic stimuli: The volume of economic stimuli at the national level cannot yet be set high in the re-entry phase, as the economy still has supply constraints. They can, however, already be decided politically in a steplike structure and designed in such a way that later stages of ignition can be identified in advance when normal business conditions are restored and can then be easily implemented. In Germany, policy measures amounting to an additional one to two percent of GDP will probably be necessary in the re-entry phase in order to quickly restore higher employment and entrepreneurial recovery in most sectors. During the stabilisation and recovery phase, additional impetus for growth and employment will have to be provided throughout Europe.

The correct scaling of such measures must be clarified by the heads of state and government, if possible even during this quarter and in the light of the actual development of economic activity at least for the next two years. Given the enormous scale of the economic collapse, the response must also be appropriately large.

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Europe-wide coordination for support measures: The European level should work closely with the national level on further support measures. In order to achieve major effects for the European international market it is best to coordinate all these incentives at the European level. European Commission, ESM and EIB programmes, additional expenditure from the current EU budget or additional resources from a reconstruction fund are appropriate in this phase. There are sufficient legally robust ways available to mobilise these investment funds.

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Developing and emerging countries remain in focus: Due to the asymmetrical progress of this crisis, world trade and global investment flows are likely to recover only slowly. In contrast to the recent financial and economic crisis, it should also not be expected that emerging and developing countries, as growth drivers, will quickly pull export-driven countries such as Germany out of the

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crisis. Therefore, on the one hand, it is urgent that Germany and the EU work together in the IMF to ensure through financing that developing countries are protected from even greater problems.

On the other hand, it is to be expected that demand from many developing and emerging countries for consumer and capital goods will remain weak for several years and will trigger painful adjustment processes within Germany and other industrialised countries.

Specific Economic Policy Measures Tax policy 

Possibility to reactively offset losses incurred in 2020: Companies should be able to retroactively offset current net operating losses by carrying backward losses to the previous year effectively immediately. According to existing regulations, net operating losses can only be carried back when the final tax return for 2020 has been prepared. In order to provide liquidity support, companies should be able to offset anticipated losses for 2020 against tax prepayments already made for this year. This should be accompanied by an increase in the total amount of net operating losses which can be carried back.

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Creation of a moratorium on taxes and bureaucracy: The state of emergency due to the Covid19 pandemic ties up resources of businesses. At a time, where especially small and medium-sized enterprises (SMEs) or family-run businesses are struggling with acute crisis management any additional increase of compliance requirements in the area of taxation should be postponed. Considering these challenges, the mandatory disclosure rules for cross-border tax arrangements should be postponed EU-wide by one year to 1 July 2021. Similarly, the implementation of the “ATAD Directive” into domestic law must be limited to the minimum requirements. The current threshold for law taxation of 25 percent should be lowered to a maximum of 15 percent until the end of 2020.

For companies, this would lead to a significant reduction of reporting obligations.

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Postponing the OECD’s work relating to tax challenges arising from the digitisation of the economy: The changes of the international tax system as proposed by the OECD cause considerable additional administrative burden for businesses. Since businesses’ capacity is limited in these times of crisis, any additional administrative burden should be avoided. Therefore, BDI calls on the OECD to postpone the deadline of its digital agenda by one to two years.

Mobility and Logistics 

Define elements of health care for all modes of transport: The re-entry phase could initially be defined for a period of six weeks. The "Federal Government Guidelines" and an equal treatment of all public transport modes should also serve as a point of orientation. Elements of health care in the re-entry phase exist for all modes of transport in the following areas: Identification of infected persons so that quarantine and health measures can be initiated immediately; supply of clean air in the means of transport; handling cases of infection; keeping distance as well as further hygiene measures.

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Special health protection measures: In the re-entry phase of air traffic, both nationally and at the EU level, the German government should advocate special health protection measures (such as hygiene regulations for air security checks, check-in, at the gate and on board). The length of this phase and of health precaution measures must be precisely defined by the Federal Government and implemented in coordination with the Länder.

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Ensuring the effectiveness of economic stimuli by accelerating planning and approval procedures in the area of transport infrastructure: It was already apparent in the course of the

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measures initiated during the national debt and financial crisis to stimulate the economy that the earliest possible timing of investment, i.e. the prompt outflow of funds made available in the federal budget, is of decisive importance for the effectiveness of measures taken. In one of the investment areas with the greatest potential for this, the transport infrastructure, complex planning and approval procedures that are susceptible to delays prevent timely investment today. However, the more time passes between the fiscal decision in favour of a project on the one hand and project commissioning on the other, the greater the loss of effectiveness for supporting the economy. It should therefore be examined to what extent, with reference to the coronavirus crisis, infrastructure projects - at times and/or along criteria to be specified (for example with regard to their relevance to climate protection) - can be gradually exempted from approval and procedural requirements.

The nationwide access to digital building permits (as the “Onlinezugangsgesetz” intends) can also contribute to this. 

Secure supply chains in air freight logistics: Secure supply chains in air freight logistics and air passenger traffic must be maintained. Deadline extensions addressing recertification, training and new approvals of companies and personnel working in the field of air safety must be extended unbureaucratically, quickly and without application, especially in the case of a long-term re-entry phase. An unbureaucratic and rapid processing of applications as well as a guarantee for available permissions must be ensured.

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International coordination for the ramp-up of air traffic: The ramp-up of air traffic, both air transport of passengers and air freight, must ideally take place in an internationally coordinated manner in the initial phase and with increasing normalization. In international air traffic with third countries, efforts must be made to ensure the smooth overall handling of air freight and passenger traffic. This also applies to the sometimes critically developing constellation due to different approaches at central airports in third countries (e.g. in the fields of crews, slots, handling, customs, security, supplier traffic). In order to safeguard the network of air freight supply chains it is crucial to uphold exemption clauses for maintaining the so-called Green Lanes at EU and national level.

In this re-entry phase respective handling and processing capacities at EU airports and borders must be provided. The maintenance of air freight logistics and passenger air traffic must be urgently secured and supported.

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Take driver shortage into account: The shutdown-induced slump in demand for transport services in road freight transport is currently leading to a reduction in at least indirectly available transport capacities. This market reaction can lead to a delay in the availability of transport capacities in Germany when demand increases again. This is an alarming and by no means unlikely scenario, given the great dependence of value-added structures in Germany and Europe on efficient truck logistics and the shortage of drivers in Germany, which is already in the region of 45,000 to 60,000 missing drivers.

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National relaxation of cabotage regulations: An effective instrument to prevent bottlenecks is the national relaxation of cabotage regulations: In the event of emerging bottlenecks, foreign hauliers should be temporarily allowed to offer their services to a greater extent in Germany. This should be possible without having to make extra international journeys (to their home countries) after three journeys within seven days. Given the minimum wage rules applicable to these cabotage services, a national relaxation should not lead to greater distortions in competition within the transport sector than, for example, varying tax rates on fuel.

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Consider concrete supply chains and locations for rail freight supply: Pandemic-related staff shortages in railway infrastructure companies (personnel in the signal boxes, train formation yards, classification yards and terminals) and in railway transport companies (train drivers) can lead to a

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situation in which, in the course of the pandemic, transports are reduced to a basic supply and thus parts of the railway networks cannot be used for freight transport. Particularly in sectors in which substitution by other modes of transport is largely impossible (chemicals, energy/mineral oil, steel) or which are not classified as part of the basic supply, these restrictions can make it considerably more difficult to restart production. It is therefore always necessary to consider specific supply chains and locations, both when defining a basic rail freight service and when prioritising transport services in the event of an incipient recovery. Simple prioritization along quantities and industrial branches, on the other hand, fails due to the complexity of the value chains that rely on rail freight transport. 

Ensure the operability of inland waterway transport: Among other things, European inland waterway transport is responsible for a substantial part of the supply of raw materials to the energy, steel and chemical industries and is therefore indispensable. In order to avoid supply bottlenecks and maintain supply chains, it is essential to ensure the operability of inland waterway transport.

To this end, personnel capacities must be guaranteed. Different entry and quarantine regulations in neighbouring European countries also affect inland waterway transport and lead to staff shortages. These must be avoided in consultation with neighbouring countries. Cross-border traffic must be restarted in coordination with neighbouring countries and must consider the partly different national developments of the pandemic.

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Ensure maritime cargo transport: Maritime supply chains need to be revitalized and capacities must be rebuilt. To this end, work within terminals must be maintained and a smooth overall handling in the ports must be guaranteed for maritime traffic or maritime freight traffic with third countries. The Federal Government should work at the international level to ensure that coordination and smooth processes are guaranteed in hinterland traffic to the ports.

Digitisation and Innovation Policy 

Extend the use of swarm data: The use of swarm data by providing anonymised mobile phone data to combat the coronavirus crisis must be further expanded. So far, eight European telecom operators have agreed to make their data available to the EU Commission. By using this swarm data, it is possible to analyse regional peaks of Covid-19 and to better prevent further spread of the virus. The use of this metadata should be further expanded on a European level.

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Expand the promotion of artificial intelligence (AI): AI is already being used in order to develop medicine to combat the virus. Even after the pandemic, AI will continue to provide a significant boost to economic activities in this country. It is therefore an important signal that the Federal Government is keeping a close eye on the promotion of AI in this phase and is expanding it as far as possible.

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Flexibility in the extension of deadlines for EU research projects: The Covid-19 crisis is affecting current and future EU research and innovation projects under Horizon 2020. The European Commission should be flexible in its handling of necessary extensions of deadlines, depending on the situation.

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Finalise Horizon Europe and Digital Europe: It is important to rapidly rebuild the economy and the innovation ecosystem after this crisis. There is a high risk that research will not be given the priority it needs. After all, R&D only has a long-term impact, and post-crisis measures that have an immediate impact are particularly necessary. The EU Member States, the EU Commission and the European Parliament should set a good example and finalise the negotiations on the Multiannual Financial Framework with an adequate budget for important future programmes such as Horizon

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Europe (at least €100 billion) and Digital Europe (at least €10 billion). This is the only way to ensure that Horizon Europe starts on time on January 1, 2021 and can make a central contribution to a strong pan-European research and innovation ecosystem after the Covid-19 crisis.

Energy and Climate Policy 

Promote investment: Providing a climate stimulus package would now enable long-term investment decisions for low carbon technologies. In doing so, climate and energy policy-relevant burdens must be reduced - including those that will arise in the foreseeable future. In this way, an investment-friendly environment can be created that will enable the ambitious German climate target of at least 55 percent greenhouse gas reduction by 2030 to be achieved and set the course for 2050. This requires both reliable political signals and close international cooperation. After the crisis, the German government and the EU will no longer be able to afford bad timing, actionism, expensive national special approaches or even autarky efforts. The result will be a narrow ridge, but also a real chance for a Green Deal agreed in the EU.



Creating a scope for investment: The following points can create the crucial freedom of action: Orient investment potential towards achieving the 2050 target; promote long-term investment and enable more intensive cooperation between the EU and its Member States, which is a better alternative to going it alone at the national level. State burdens on energy costs must be reduced in order to expand companies' liquidity and investment scope. Special approvals under state aid law for economic stimulus programmes addressing climate and energy policy should be made possible.

External Economic Policy 

Revise European export restrictions: The EU Commission has recently announced that from the end of April it will only restrict the export of face masks and allow the export of other protective clothing. This is an important first step. The Commission will monitor and control the export practice through a requirement for consultation for national licensing authorities. However, this measure also creates ripple effects. In order to avoid production stoppages in branches that are relevant to the fight against the pandemic, the export of face masks for use in the production and for crossborder internal deliveries must be exempted from the licensing requirement. Time is also a scarce resource in the fight against the pandemic. The EU should therefore avoid bureaucratic obstacles.



Initiate customs simplifications: Customs simplifications by German authorities can create urgently needed liquidity, especially for export-oriented small and medium-sized family businesses.

For example, manufacturing companies should be granted interest-free suspension of payment of customs duties on goods in HS Chapters 25-96 for at least a period of six to nine months. This measure would create congruence with the Federal Government's other tax policy decisions. In addition, the Federal Government should quickly initiate the offsetting of import turnover tax against turnover tax.



Extend the exemption from import duties and VAT: Although the EU Commission, with a decision of 3 April 2020, exempted from import duties and value added tax such goods that are needed to combat the effects of the Covid-19 pandemic, the EU Commission has now extended the exemption from import duties and value added tax. However, this exemption only applies to a very limited number of goods and only if they are imported by government institutions or aid agencies.

These exemptions should also be extended to private companies. This would ensure that basic economic activities, which play an important role in the fight against the pandemic, remain viable.

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

Adjust foreign trade and investment promotion: The Federal Government's foreign trade and investment promotion should facilitate the financing and hedging of foreign business even beyond the crisis mode. An extension of the KfW refinancing programme for covered export credits is indicated. This will expire already at the end of 2020. Under the OECD rules, a first instalment of 15 percent is currently requested when a state export credit agency (ECA) insures loans to finance exports, such as supplier or buyer credits, with a term of more than two years. In such cases, therefore, only 85 percent of the transaction can be covered and financed by an export guarantee.

This first instalment should be suspended.



Ensure liquidity and solvency of developing and emerging countries: Like all countries, developing and emerging countries are suffering from the consequences of the pandemic itself and the associated economic slump. In addition, they are particularly vulnerable to unprecedented levels of capital outflows and foreign exchange scarcities. The liquidity and solvency of these countries and their companies must remain assured.

Raw Materials Policy 

Maintain raw material markets: A sharp downturn in the global economy is currently leading to a significant drop in demand. Mining companies are therefore temporarily suspending or reducing production. With a restart of the global economy following the coronavirus pandemic, there consequently will be the risk of bottlenecks in individual raw materials. The supply situation for raw materials with a high market concentration (e.g. rare soil or cobalt) could become particularly critical.

The German government must ensure that raw materials markets are not disturbed by trade and competition distortions. Protectionist measures by the Chinese government, in particular, could have a massive negative impact on the availability of raw materials.



Increase capacities of the German Mineral Resources Agency (DERA): In order to analyse the effects of the pandemic, the personnel and financial capacities of the German Mineral Resources Agency (DERA) should be increased as quickly as possible. Updates on market developments should then be carried out more closely. The advisory services offered by the corresponding competence centres at German Chambers of Commerce abroad should be significantly expanded in order to further diversify sources of critical import raw materials.

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Phase 3: Stabilisation The industry is likely to enter a short period of stabilisation after the re-entry phase, during which industrial production had to be organised with tighter health and safety conditions. This is expected to be the case from the first quarter of 2021 for a period of one to a maximum of two quarters. During this phase, restrictions on public life can be largely lifted and economic activity can domestically be conducted largely undisturbed. International disturbances, however, will still be considerable. The weak global demand will challenge German companies, particularly the industry, which does not yet make a return to pre-crisis levels appear plausible within 2020. Financing problems will therefore persist but will increasingly be solved in the market. In macroeconomic terms, a recovery to the old level of precrisis economic activity will probably not be achieved until 2021 at the earliest, and possibly not until 2022.

General Economic Policy Measures 

Boost demand and private household consumption: In this phase, national economic policy can be flanked by investment incentives for private businesses (e.g. through depreciation regulations and lower tax rates, faster approval procedures and acceleration of planning, relaxation of strict conditions for so-called structural crisis cartels), faster implementation of public investment (e.g. fleet renewal or municipal procurement programmes, faster implementation of infrastructure projects), temporarily lower income tax burdens and a temporary reduction of the VAT rate. The best thing to do now is to increase the volume of measures from the re-entry phase, which can also be absorbed by the economy. The measures must also extend into the recovery phase. The aim must be to stabilise corporate investment activity in a phase of massive weakness in demand and high uncertainty, and to boost consumer spending by private households.



Coordinated strategy at the European level: For large parts of industry, an impulse from Germany alone will not have much effect considering the great importance of their international business. Corresponding impulses in the Asian market and possibly also in the United States would also be important. The decisive factor is to embed policies in a suitable European strategy. This will be particularly necessary for the recovery phase, in which there are only minor restrictions on economic activity within Europe and economic policy stimuli can also be absorbed.



Restore the EU internal market: At this stage it will also be important to restore the EU internal market. The crisis must be used as an opportunity to push for a fundamental re-launch of the internal market in all areas. The numerous restrictions on the free movement of persons and goods in the internal market and the European Economic Area (EEA) must be lifted. In addition, it must then also be examined whether special rules in individual policy areas addressing the pandemic can be lifted again or still need to be kept. Of particular importance is the return to mobility for workers.

Specific Economic Policy Measures Tax Policy 

Improvement of the deduction of net income losses: The possibility to offset net income losses must be improved by law. Current and future losses incurred during the period of the coronavirus crisis must be fully exploited. The applicable rule under the German tax legislation on loss deduction appears too rigid, in particular due to the limited amount. To this end, loss carry-back should be possible for the last four years at least. At the same time, the volume of losses carried back

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should be increased significantly. In addition, the so-called minimum taxation should be suspended.

Law and Competition 

Lift deferment regulations: The moratoria on the law of obligations introduced in order to deal with Covid-19, in particular the deferral regulations, must quickly be lifted again. Otherwise, the payment flows will break off and the value chains will be permanently burdened. The bridging of liquidity bottlenecks cannot be at the expense of the contractual partner any more than to the usual extent. Overall, the legal framework must not be used as an instrument for implementing sociopolitical objectives but must once again be geared more strongly to relieving companies of requirements such as excessive reporting obligations. Thus, even in public procurement law, the accelerated procurement of urgently needed goods and services must not be slowed down and made more difficult again by the specification of strategic aspects.



Use competition law as a driver of innovation: Competition law has a key function as a driver of innovation when the economy revives. Cooperation must be facilitated - beyond the research and development of medicine and protective goods in times of crisis - and structural crisis cartels must continue to be possible if they serve the industries in their reconstruction. A level playing field must be established between public and private companies, provided that public companies are economically active. Especially in times of crisis, private companies have proven that they can close government procurement gaps quickly and efficiently. Coping with the consequences of the Covid-19 crisis must not lead to excessive economic activity by the public sector.

Digitization 

Offer unbureaucratic IT support programmes and consultancy for SMEs: SMEs need tailormade support to adapt their IT to the technical challenges arising from the current crisis situation.

Support programmes and consultancy services that help SMEs to adapt their IT systems accordingly should be easy to find with just a few clicks and should be available in a simple and unbureaucratic way.



Expansion of gigabit networks: As part of the current crisis management, the digital infrastructure in Germany has basically passed the stress test. The rapid expansion of gigabit networks must be pushed ahead at full speed parallel to the restart. The current crisis is a great opportunity for the digitization of business and administration. Many companies have discovered digital potential for themselves during the crisis transition, which they want to develop during the restart. The goal of a nationwide digital infrastructure can only be achieved if the telecommunications companies have the appropriate investment security. To this end, the TKG amendment, the IT security law 2.0 and the extended security catalogue to §109 TKG in particular must be urgently implemented now. Due to site closures, short-time work and health restrictions for research personnel, many publicly funded R&D projects cannot be continued or started as planned. The Federal Government should extend already approved or ongoing projects for at least three months at no cost and should also adapt the modalities and deadlines of project planning and approval of new programmes to the crisis situation.

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External Economic Policy 

Strengthen liberal and rule-based world economic order: The German government should also work during the stabilisation phase to ensure that measures to combat protectionism and liberalize trade policy are implemented as broadly and comprehensively as possible internationally. The EU's liberal trade agenda should continue to have its backing in order to give positive impetus to industry and the export sector through reliable international framework conditions and new market access. Bilateral trade agreements with Asian-Pacific and Latin American partner countries are a central element in this context. The ratification and implementation of the EU-Mercosur Agreement is particularly important. The EU should also press ahead with negotiations with Mexico on the modernisation of the trade agreement. Relations with the key economic partners, the United States and China, must be placed on a solid foundation. This means, among other things, that the trade conflicts with the United States should be resolved and agreements for closer economic exchange should be tackled more intensively again. The negotiations with China on an investment agreement should be continued and concluded in an ambitious manner.



Responding to changes in the ratings of international customers: It must be expected that the ratings of individual international customers will deteriorate significantly due to the crisis. It is therefore important to reach a common understanding with Euler Hermes on how to deal with deteriorating credit ratings. This includes, for example, clarifying the questions of which standards should apply and how processes can remain lean and predictable.

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Phase 4: Recovery A recovery to the old level of pre-crisis economic activity will probably be achieved in the course of 2021 at the earliest, and possibly rather in 2022. In some sectors, a dip in demand over several years compared with the pre-crisis period is to be expected. The consumer goods sectors are likely to recover somewhat more quickly if the slumps in income and employment can be corrected accordingly. The recovery on the labour market is typically delayed and, depending on the size of the collapse, is likely to take several years throughout Europe. This has a permanent dampening effect on private consumption and the demand for consumer goods.

General Economic Policy Measures 

Longer-term measures along a growth programme: Measures of a longer-term nature along a growth programme will be necessary then, e.g. increasing public investment, improving infrastructure, reducing the tax burden on companies, providing greater support for research and technical progress and implementing the German Industrial Strategy 2030 with its various location and industrial policy concerns; as well as pursuing an ambitious industrial and digital strategy in the EU, for which the proposals are on the table. For the latter issues, in particular, there is already a substantial consensus on the areas in which action is needed. However, there is still a lack of legal regulations and financial resources at the German and the European level. These measures and funding should be tackled immediately. In addition, possible additional expenditure should be integrated both in national budget planning and in the negotiations on the Multiannual Financial Framework. Temporary extra funds with a clear legal basis from the EU must be decided quickly by the heads of state and government.



Initiate the withdrawal of the state from shareholdings: In addition, measures should be introduced to reduce the state's holdings based on the “Wirtschaftsstabilisierungsfond” (Economic Stability Fund), which had been decided in the first phases.



Enable EU funding channels: In the stabilisation and recovery phase, volumes of a substantial size should be mobilised to rebuild the European economy over a period of two years. The measures adopted so far addressing the ESM, the European Investment Bank and the SURE short-time working allowance are intended to provide further funds for the stabilisation of companies of all sizes and for the income of employees. In addition, funds will be needed throughout Europe to revive the forces of growth. In addition to the Member States, this must also be made possible through collective funding channels. The exact dosage will depend on the depth of the slump and must be decided by the Heads of State and Government in good time. For some countries in Europe, the slump can amount to as much as ten percent of annual economic output, especially for Italy and Spain. In the EU and the eurozone it is likely to be closer to five percent, in Germany probably between three and five percent (similarly strong in the real terms, but cushioned by fiscal policy). This can only be meaningfully combined by the Heads of State and Government together with the other European institutions in an overall view of possible funding channels.



Bring national policies in line with EU initiatives: The integration of the four EU dossiers "Green Deal", "Digitisation", "Industrial Strategy" and "Sustainable Finance" into the design of the recovery programme must be well coordinated. The national implementation of the individual policy areas must in turn be consistent with the EU initiatives. Since these fields are also investment issues, their integration should be aligned with the promotion of new value-added structures in particular by means of appropriate regulatory and financial flanking measures. Tough regulatory interventions that would lead to an early devaluation of the capital stock beyond the politically agreed

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market mechanisms, such as in emissions trading, would have to be postponed for at least one to two years. 

Support corporate strategies to increase the resilience of value chains: It can be assumed that the recovery phase will still be strongly influenced by experiences and decisions made during the crisis. Globally different political answers to fundamental questions such as the openness of markets, supply guarantee and supply chains, state controls and localization will have to lead to new compromises and rules in international cooperation. It is essential to reduce uncertainty for internationally active economic actors. Cross-border trade and investment will need to be stimulated by trade facilitation and confidence-building measures such as reliable international rules.

Neither the Federal Government nor the EU should push ahead with the restructuring of value chains ex officio. The companies - listed corporations and small or medium-sized businesses alike - are in a position on their own to bring more resilience into their supply chains and value chains in order to cushion future vulnerabilities through greater diversification, even if this will lead to higher production costs overall.

Introduction of a Growth Programme At this stage, it is time for a long-term growth programme with strengthened public investment, modernised corporate taxation, expanded support for research and technological progress and the implementation of the Industrial Strategy 2030 with its various location and industrial policy concerns. Core elements of such a strategy should be: 

Set the course for an internationally competitive tax burden for German companies: In order to strengthen companies and to support investments in their German headquarters, it is crucial to create an internationally competitive tax burden. This can be achieved through a number of measures in several tax laws, particularly through the complete abolishment of the solidarity surcharge for all payers. In addition, German corporate taxation legislation is in urgent need of modernisation. Moreover, tax obstacles for corporations should be removed and the preferential taxation scheme for retained profits of business partnerships should be improved.



Extend tax incentives for research and development and improve depreciation conditions: The German Act on Tax Incentives for Research and Development, which became effective 1 January 2020, is an important tool for supporting innovation and a major step forward in strengthening Germany as a business location. However, this measure is not going far enough and must be expanded in terms of its volume in order to achieve an effective impact. In addition, the conditions for depreciation should be improved by temporarily re-introducing degressive depreciation allowances, especially for digital assets.



Adjustment of interest rates: Tax interest rates must finally be brought into line with current market levels. To this end, the interest rates for the payment of tax arrears rates should be lowered from the current monthly rate of 0.5 percent. Additionally, the interest rate of 6 percent for determining pension provisions for tax purposes (§ 6a EStG) should be adjusted.



Additional investment incentives for building refurbishment: With a domestic value added of over 80 percent, energy-efficient building refurbishment is an important growth driver. At the same time, from an economic perspective, the building sector with its low avoidance costs is a key to efficiently achieving climate protection targets. The coronavirus crisis must therefore be taken as an opportunity to strengthen and complete the impetus provided by the climate package. This must include: An increase in the funding rates of tax subsidies and programme funding to 30 percent, the introduction of a tax subsidy for rented buildings and non-residential buildings (deductibility of

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refurbishment costs as immediately deductible maintenance costs) and the start of a nationwide refurbishment of public buildings. 

Revitalise the EU internal market: The basis for the relaunch of the internal market should above all be the EU Commission's communication on obstacles in the internal market and the action plan for the enforcement of the internal market. The Commission has correctly identified many of the problems and has presented sensible proposals for solutions. However, their implementation is mainly up to the Member States. Particularly the large countries have a duty now to refrain from national initiatives and the protection of their markets and should, instead, strengthen administrative cooperation and mutual recognition.



Deepen the internal market in services: The central focus should be on deepening the internal market in services and the mobility of workers. Services are the largest and fastest growing sector in Europe, accounting for over 70 percent of European economic output. Mobility is crucial for cross-border services. The dismantling of existing barriers in this area would bring the EU an additional 338 billion euros or 2.4 percent of economic output annually.



Assessment of the EU Climate Change Plan 2030: An assessment of the EU Climate Change Plan 2030 based on an impact analysis while taking into account the investment potential after the coronavirus pandemic is required.



Strengthen the World Trade Organization (WTO): Multilateral and plurilateral agreements under the umbrella of the WTO remain the ideal way to ensure reliable framework conditions for world trade. The EU should continue its course of modernising and strengthening the WTO. Elements of this include: the reform of the dispute settlement, more effective transparency mechanisms, rules for state-owned enterprises and against excessive subsidies, and plurilateral agreements on ecommerce and investment facilitation.



Conclude ambitious trade agreements: The EU should conclude ambitious trade agreements with selected strategic partners, which not only eliminate tariffs and significantly reduce non-tariff barriers, but also include rules that reflect the characteristics of modern trade. This includes rules for digital trade, but also sustainability chapters and dispute settlement mechanisms. In addition, trade agreements that have already been concluded must be ratified and put into force quickly. If, in the case of Mercosur, this has not already been done in the stabilisation phase, it must become a priority for the recovery phase. In addition, the EU should continue to press ahead with the implementation of the outstanding Economic Partnership Agreements (EPAs) between the EU and the African states.



Improve enforcement of existing trade agreements: The German government and the EU must focus on the implementation of existing trade agreements and the improved usability of agreements by companies. For the enforcement of trade agreements, the cooperative approach of the EU has basically proved its worth. At the same time, all instruments of trade diplomacy and coordination between all levels – the EU, Member States and different economies – should be used in the event of persistent trade problems. A reinforcement of trade defence instruments and the creation of new EU instruments must be considered in the context of international obligations and the overall interest of the economy.



Shaping trade agreements along fair competition lines: Multilateral, plurilateral and bilateral trade agreements and unilateral measures by the EU must be used to promote structures that enable competition on an equal footing, i.e. balanced regulations and market access between market- and state-economy states as well as industrialised, emerging and developing countries.

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Germany and the EU should remain a driver of development through trilateral cooperation with the United States and Japan, the G7 and G20. The unilateral measures, such as the creation of international subsidy or procurement instruments, must be geared to the interests of an open market economy and must not fuel protectionist vicious circles. New burdens on the trading system, for example to flank climate policy goals, must be examined very comprehensively and avoided if possible. 

Strengthening health protection internationally: The fight against the coronavirus pandemic must also be strengthened in developing and emerging countries by investments into health protection. The pandemic will only be overcome if individual countries and regions do not become a reservoir for infectious transmissions. Multilateral key players such as the WHO must be strengthened financially and organizationally to achieve this goal and must be complemented through bilateral initiatives.

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Imprint Federation of German Industries (BDI) Breite Straße 29, 10178 Berlin Germany www.bdi.eu T: +49 30 2028-0

Contact persons Dr. Klaus Günter Deutsch Head of Department Research, Industrial and Economic Policy T: +49 30 2028-1591 k.deutsch@bdi.eu Matthias Krämer Head of Department Strategic Planning and Coordination T: +49 30 2028-1421 m.kraemer@bdi.eu Julia Callies Senior Manager Strategic Planning and Coordination T: +49 30 2028-1446 j.callies@bdi.eu

BDI document number: D 1172

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