Newsletter April 2020

The COVID-19 pandemic has shaken economies around the world. While the German Bundestag has adopted a rescue package that will be financed through deficit spending, other eurozone states, such as Italy and Spain, have less room for financial manoeuvre due to high existing debt levels. Accordingly, Italy and Spain have been leading calls for the introduction of ‘corona bonds’.

The world is in a state of emergency. The spread of the coronavirus presents us with a situation we have never faced before. Our daily routines have radically changed; economies are struggling as supply and demand are collapsing at the same time. With a recession looming, policymakers are already discussing about how to reboot the economy. The crisis, which poses a crucial test for Germany and Europe, was the focus of #ZEWlive, an event hosted exclusively online for the first time as part of the ZEW event series “First-Hand Information on Economic Policy”.

The restrictions on public life imposed by German policymakers are effective measures for containing the coronavirus, but in addition to sanctioning those who breach the rules, instruments should be put in place that reward citizens for responsible behaviour. Mobile devices and systems are particularly well suited for implementing such a system, argues Dr. Dominik Rehse, head of the Junior Research Group “Digital Market Design”.

The interdisciplinary approach of market design lies in the DNA of our institute. ZEW, a member of the Leibniz Association, is one of the leading institutes for market design in Europe, thereby helping to shape a world worth living in.

Working from home instead of at the office, suffering from existential fears instead of disposing of sufficient liquidity, and experiencing economic decline instead of a boom – the coronavirus pandemic has a direct impact both on the economy and on the population. We at ZEW are closely following these latest developments. On our new theme page, we have compiled information about the economic consequences of the coronavirus crisis. The page summarises our central research findings and gives an overview of our key research areas:
 
• Working World and Businesses in Germany
• Economic Development
 
In addition, the theme page provides a list of experts and offers an overview of current research questions, statements and publications on this topic.
 

The spin-off company istari.ai associated with ZEW Mannheim was nominated for the 2020 Leibniz Start-Up Prize. The start-up developed an artificial intelligence (AI) system that analyses company information online in a high-frequency and fully automated manner. The company was founded as a result of a joint research project of ZEW and Giessen University on web-based innovation indicators, which was funded by the Federal Ministry for Education and Research.

Following severe economic consequences from the coronavirus pandemic, an improvement now seems to be in sight for the People’s Republic of China, with economic expectations rising sharply in the current survey for April (15–22 April 2020). The CEP indicator, based on the China Economic Panel (CEP) and reflecting the economic expectations of international financial market experts for China on a 12-month basis, currently stands at 36.5 points, 25.4 points higher than in the previous month (11.1 points in March 2020).

Internal financing constraints in firms impair their own research and development (R&D) investments, especially when these firms are facing restrictions on borrowing. The balance sheet of a firm’s main bank also plays a decisive role in how much internal financing bottlenecks influence the investments a firm makes in R&D. Investments by firms with a lower credit rating drop particularly sharply if the main bank is beleaguered. These are the results of a study conducted by ZEW Mannheim in cooperation with TU Dortmund University.

For the latest EU summit video conference on tackling the consequences of the coronavirus pandemic, European leaders agreed on a 500 billion euro rescue package and a European Recovery Fund. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

Corona bonds are not particularly popular with financial market experts. By contrast, loans from the European Stability Mechanism (ESM) and additional financial aid from the EU budget are considered to be more sensible solutions to ensure economic stability in the eurozone in view of the looming recession triggered by the coronavirus pandemic. This is the result of a special question included in the latest ZEW Financial Market Survey among 203 financial market experts. The survey was conducted by ZEW Mannheim in April 2020.

A ‘European Recovery Fund’ (ERF) of 1.5 trillion euros would not be able to significantly help highly indebted euro countries such as Italy and Spain to cope with their rapidly increasing national debt. Even financing the fund through corona bonds would not bring any notable additional relief. This is the result of calculations presented by Professor Friedrich Heinemann, Europe expert at ZEW Mannheim, on the possible distributional effects of an ERF.

The ZEW Indicator of Economic Sentiment for Germany has risen by 77.7 points in April 2020, now being valued at 28.2 points. The assessment of the current economic situation, however, has worsened dramatically, with the corresponding indicator dropping to a new reading of minus 91.5 points, 48.4 points lower than in March. This constellation of values currently witnessed for expectations and the assessment of the current situation roughly corresponds to that seen in April/May 2009 during the financial crisis.

The effects of the current coronavirus crisis are also evident on the websites of companies based in Germany. Within the last four weeks, the share of companies mentioning the pandemic on their websites has increased by almost 40 per cent to more than 150,000 companies (14.2 per cent). Both the percentage of affected companies and the reasons for mentioning the pandemic vary according to sector and geographical location. These are the findings of a unique online evaluation of company websites by ZEW Mannheim and the Justus Liebig University (JLU) Giessen in cooperation with the start-up company istari.ai.

The economic consequences of the coronavirus pandemic will most likely force companies to also reduce spending on research and development (R&D). However, experiences from past recessions show that innovative companies are significantly more resilient and less likely to lay off workers than companies without innovations. The current coronavirus crisis has required many companies to develop creative solutions for products. They have, however, had less opportunities to cooperate with external partners like they had in past crises.

This will most likely make conditions for company investments in R&D more difficult, especially in light of the fact that their own R&D workers currently have to work from home. These are the results of a recent ZEW policy brief published by ZEW Mannheim and the AIT Austrian Institute of Technology.

In a recently published opinion piece, ZEW President Professor Achim Wambach and Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance”, argue in favour of using the European Stability Mechanism as an instrument of financial assistance instead of corona bonds. In their view, corona bonds are difficult to implement, their underlying concept would not meet the desired needs and they would currently do more harm than good to Europe.

Corona bonds offer no convincing added value compared to, for example, a European Stability Mechanism (ESM) credit line for COVID-19-related expenditure. The issuance of corona bonds could further complicate the market access of highly indebted euro states, as these bonds could be interpreted as a signal for imminent payment problems of these states. The ESM’s precautionary credit line with short maturities is the preferable option as an instrument in the acute phase of the crisis. These are the conclusions of a ZEW expert brief presented by Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim.

The economic sentiment in the information and communication technology sector (ICT) in Germany fell to a historic low in the first quarter of 2020. The ZEW sentiment indicator for the companies in the ICT sector plunged to a reading of 51.1 points as a result of the coronavirus pandemic, falling by more than 17 points compared to the previous quarter. This is the worst assessment of the economic climate and the sharpest drop recorded since the survey was started in 2011. The ZEW Economic Sentiment Indicator for the Information Economy is the result of a survey conducted by ZEW Mannheim in March 2020.

Almost six per cent of all companies in Germany used artificial intelligence (AI) in 2019. These companies spent around 4.8 billion euros in the field of AI and employed 139,000 people who either fully or partially carried out AI activities. However, there is a lack of qualified personnel: almost one in two vacant AI positions could only be filled inadequately or not at all last year. These are the results of a study by ZEW Mannheim on behalf of the Federal Ministry for Economic Affairs and Energy.

Our publications are available to download in PDF format. PDF files can be viewed using, among others, Acrobat Reader, which you can download for free at https://acrobat. adobe. com/us/en/acrobat/pdf-reader. html

Friedrich Heinemann
Simulating a European Recovery Fund

Jan Kinne, Miriam Krüger, David Lenz, Georg Licht, and Peter Winker
Corona Pandemic Affects Companies Differently
A High-Frequency Website Analysis of Companies’ Reactions to the Coronavirus Pandemic in Germany

Matthias Rodemeier and Andreas Löschel
The Welfare Effects of Persuasion and Taxation: Theory and Evidence from the Field

Marek Giebel and Kornelius Kraft
R&D Investment Under Financing Constraints

Kurt Schmidheiny and Sebastian Siegloch
On Event Studies and Distributed Lags in Two-Way Fixed Effects Models: Identification, Equivalence, and Generalization

Friedhelm Pfeiffer and Holger Stichnoth
Fiscal and Individual Rates of Return to University Education With and Without Graduation

Carlo Gallier and Bodo Sturm
The Ratchet Effect in Social Dilemmas

Karl-Martin Ehrhart, Ann-Katrin Hanke, and Marion Ott
A Small Volume Reduction that Melts Down the Market: Auctions with Endogenous Rationing

Paolo Brunori and Guido Neidhöfer
The Evolution of Inequality of Opportunity in Germany: A Machine Learning Approach

Ulrich Kaiser and Johan M. Kuhn
The Value of Publicly Available, Textual and Non-textual Information For Startup Performance Prediction
Textual and Non-textual Information For Startup Performance Prediction

Raphaela Andres, Daniel Erdsiek, Jörg Ohnemus, Christian Rammer, and Steffen Viete
2019 Cultural and Creative Industries Monitoring Report
Summary

Bernhard Dachs and Bettina Peters
Covid-19-Krise und die erwarteten Auswirkungen auf F&E in Unternehmen (Covid-19 Crisis and the Expected Effects on R&D in Businesses)

Friedrich Heinemann
Europäische Finanzinstrumente in der Corona-Krise (European Financing Instruments in the Coronavirus Crisis)
ESM-Liquiditätshilfe versus Corona-Bonds (ESM Liquidity Assistance Versus Corona Bonds)

Christian Rammer, Irene Bertschek, Bettina Schuck, Vera Demary and Henry Goecke
Einsatz von Künstlicher Intelligenz in der Deutschen Wirtschaft (Use of Artificial Intelligence in German Businesses)
Stand der KI-Nutzung im Jahr 2019 (Overview of AI Applications in 2019)

Bastian Krieger, Christian Rammer, and Patrick Breithaupt
Identifizierung von Querschnittsthemen in Projekten der Direkten Projektförderung des BMBF (Identifying Interdisciplinary Topics in Projects of BMBF Direct Project Funding Schemes)

Entrepreneurship and Productivity

Estimating Technological Gains and Losses from International Environmental Agreements: The Case of Stock Pollutants

Health Fee Regulations and Their Implications for Health and Labour Market Outcomes in East and West Germany

Strategies on Promoting Broadband Expansion with Particular Regard to a Reduction in Regulation

The Market for Medical Products and Instruments: Competition and Innovation

In order to support the nationwide containment measures against the coronavirus, ZEW is examining to what extent the events listed here can take place virtually. Individual dates may be postponed. The current status of the events can be found in the ZEW Events Calendar. If you have any questions, please don’t hesitate to contact our event team at event@zew.de.

Speaker: Shoshana Vasserman (Stanford University, USA)
Location of the event: Online via ZOOM

Speaker: William D. Larson (Federal Housing Agency (FHFA), Washington, D.C., USA)
Location of the event: Online via ZOOM

Speaker: Renato Gomes (Toulouse School of Economics (TSE), France)
Location of the event: Online via ZOOM

Speaker: Chinhui Juhn (University of Houston, USA)
Location of the event: Online via ZOOM

Speaker: Michael Kummer (University of East Anglia (UEA), Norwich, United Kingdom) and ZEW
Location of the event: Online via ZOOM

Speaker: Daniel Sturm (London School of Economics and Political Science (LSE), United Kingdom)
Location of the event: Online via ZOOM

Speaker: Martin Halla (Johannes Kepler University Linz, Austria)
Veranstaltungsort: Online via ZOOM

Speaker: Chiara Lacava (Goethe University Frankfurt)
Location of the event: Online via ZOOM

Speaker: Tobias Salz (Massachusetts Institute of Technology (MIT), Cambridge, USA)
Location of the event: Online via ZOOM

Speaker: Christian Badarinza (National University of Singapore)
Location of the event: Online via ZOOM

Speaker: Leonardo Madio (Toulouse School of Economics (TSE), France)
Location of the event: Online via ZOOM

Speaker: Stefan Bechtold (ETH Zurich, Switzerland)
Location of the event: tbd

Speaker: Peter Cramton (University of Cologne)
Location of the event: Online via ZOOM

Picture Credits: press release of 27.04.2020: iStock.com/ansonsaw, press release of 24.04.2020: Anna Logue Fotografie / ZEW, press release of 23.04.2020: Anna Logue Fotografie / ZEW, press release of 22.04.2020: iStock.com/Photo Beto, press release of 08.04.2020: Anna Logue Fotografie / ZEW, news article of 06.04.2020: Anna Logue Fotografie / ZEW, press release of 06.04.2020: iStock.com/Photo Beto, press release of 30.03.2020: iStock.com/Kirill Smyslov
 
All further pictures: ©ZEW