Germany is expected to extend its pandemic furlough scheme to 24 months after Angela Merkel indicated she welcomed the proposal to let the kurzarbeit programme run on.
The chancellor’s spokesperson said on Monday she was “positively” inclined towards the suggestion to extend the scheme, which allows firms to put their staff on part-time work to reduce their cost. Britain’s furlough scheme initially only allowed staff to be sent home and not work but staff have been allowed to work part-time since July.
The finance minister, Olaf Scholz, first proposed extending the benefit programme, which is currently limited to claims lasting a maximum of 12 months, on Sunday. “The corona crisis won’t suddenly disappear in the next few weeks,” said Scholz, who was recently announced as the centre-left Social Democrats’ candidate for chancellor in next year’s elections.
He added: “Businesses and employees need a clear signal from the government: we’ve got your back for the long haul in this crisis, so that no one is being let go without need”.
A final decision on an extension, which it is estimated will cost €10bn (£9bn), is expected on 25 August.
The UK furlough scheme is scheduled to end in October. From August employers have had to start contributing towards its cost, first with pension and national insurance contributions, and with 10% and then 20% of wages in the next two months.
The chancellor, Rishi Sunak, said this month that the decision to wind down the UK furlough was “one of the most difficult decisions” he had had to make. But he said it was not sustainable, and that most other countries were making similar moves to wind down their schemes.
The UK scheme paid 80% of wages, up to £2,500 a month, for about 9.5 million employees at its peak. The total cost to date is nearly £35bn.
Germany’s furlough scheme is modelled on a programme that won the country praise during the 2008-09 financial crisis.
Called kurzarbeit (“short work”), it is essentially an unemployment benefit paid out to companies by the government’s Federal Employment Agency, designed to compensate lost earnings for workers who have been temporarily placed on reduced hours, and help companies avoid cutting jobs.
While the economic output of Europe’s powerhouse suffered a 10% slump in the second quarter of 2020, the furlough scheme has so far largely absorbed the accompanying shock on the labour market. German unemployment in July was at 6.3%, an annual increase of a mere 1.3 percentage points. In the US, by comparison, unemployment temporarily rose to a record 14.7% in April.
Companies can apply for kurzabeit if at least 10% of their workforce have had their working hours cut by more than 10%. By the end of April 2020, German companies had signed up more than 10.1 million workers for the scheme – almost 10 times as many as at the peak of the financial crisis.
However, not all companies which applied for the scheme used it, meaning the actual number of recipients is considerably lower.
According to estimates by the Ifo Institute for Economic Research, in July about 5.6 million employees we still on the scheme, which has proved especially popular in the manufacturing and retail sector.
Ifo’s labour market expert Sebastian Link predicted redundancies “in the high hundred thousands” if the scheme ended after 12 months.
Link said there were political reasons why the furlough would not end: “I see it as absolutely inevitable that the kurzarbeit scheme will be extended, not least because we are facing federal elections next year.
“Whether it’s sensible to do so is another matter: in some areas of the economy, such as the car industry, the furlough scheme could end up actually preventing necessary structural changes.”
When the scheme was last used on a mass scale, it only replaced about 60% of workers’ lost earnings. During the coronavirus crisis, Merkel’s coalition government decided to increase payments: after four months on the scheme, recipients receive about 70% of lost earnings, and about 80% after seven months, if they have lost more than 50% of their working hours.