Fiscal and Monetary Measures in UK and Germany

Fiscal and Monetary Measures in UK and Germany

During the COVID-19 pandemic, the UK and Germany responded in different ways to, with differing fiscal and monetary policies to contain the impacts of the worldwide disaster. The UK quickly implemented fiscal policies, such as grants and the furlough scheme, in addition to the Bank of England's tight monetary policies. On the other hand, Germany placed a strong emphasis on fiscal assistance through large stimulus plans, and the European Central Bank increased monetary support. A closer look at the effects reveals subtle differences: Germany placed more of an emphasis on long-term fiscal support in order to achieve sustained recovery, while the UK's quick action offered immediate relief. The implementation of policies is hampered by changing health crises, unstable economic conditions, and other factors. 

In response to the containment and mitigation of the COVID-19 pandemic, the UK government moved quickly to implement a number of policies designed to lessen the immediate effects on households and businesses. With a focus on the provision of financial support through tax systems as a crucial component of the overall policy framework, fiscal policy assumed a central role (Dender et al., 2020). The tax laws were coordinated with more general initiatives that included financial, monetary, health, and spending policies. Like many other countries, the UK took decisive action to ensure that economic activity continued while reducing the negative consequences caused directly by containment measures. Deferring tax payments was one of the immediate and effective ways to alleviate businesses' cash flow problems and provide a break from financial obligations during the crisis. 

Similarly, significant changes were made to the UK's monetary policy concurrently with fiscal measures. The Bank of England quickly lowered interest rates in an effort to support financial market stability and supply liquidity (Dender et al., 2020). In order to ensure that credit flow continues and that financing is available to both individuals and businesses, quantitative easing measures were strengthened. Together, these approaches of fiscal measures and accommodative monetary policies aimed to synergistically ease economic stress, fostering resilience and aiding in the eventual recovery from the pandemic-induced downturn. 

Germany on the other hand responded to the COVID-19 pandemic by enacting a number of fiscal and monetary policy measures. A €130 billion stimulus package included an unusual measure, a sudden reduction in VAT, which became one of the most visible fiscal policies (Hoang et al., 2020). The goal of this policy was to set up a future where sales taxes would rise, raising expectations of inflation and overall demand. This unorthodox fiscal strategy, intended to boost consumer expenditure, worked well, especially in modifying households' expectations for inflation and promoting immediate consumption. On the other hand, low interest rates and heavy debt loads prevented conventional monetary policies from providing the required room for economic stimulus. 

However, these measures had a wide range of effects on different sectors of both the UK and Germany economy. For UK, the fiscal support measures offered a vital lifeline, preventing businesses from collapsing right away and resulting in a large loss of jobs (Dender et al., 2020). The prompt intervention, particularly the income support programs and furlough plan, helped lessen the impact on the economy by preserving consumer spending to some degree and averting a more dire recessionary spiral. In an effort to maintain credit availability and stabilize financial markets, the Bank of England implemented monetary policy measures, most notably interest rate reductions and quantitative easing, which helped businesses obtain the capital they needed in the face of economic uncertainty. In contrast he fiscal and monetary measures enacted by Germany caused a sudden drop in VAT, coupled with the anticipation of future price increases that led to increased consumer spending (Hoang et al., 2020). This was demonstrated by households' willingness to buy durable goods, which suggested a real impact on consumption right away. Nonetheless, there were differences in these measures' efficacy. Unconventional monetary policy in the form of forward guidance seemed mainly ineffectual in inducing inflation expectations and spending plans, whereas unconventional fiscal policy had a direct impact on household behavior and spending.  

Correspondingly, enacting this monetary and fiscal policies during the pandemic posed notable challenge to both Germany and U.K.  In Germany, due to low interest rates and high debt-to-GDP ratios, there was a conflict between the need to revive the economy and the limitations on conventional measures. Additionally, the unpredictability and volatility of the pandemic made policy implementation and assessment difficult. Uncertainty regarding the duration and severity of the crisis further complicated the effectiveness of policy measures (Hoang et al., 2020). This was especially noticeable when it came to forward guidance, as households appeared to be less receptive because of their ignorance. Conversely, as the crisis deepened in UK, difficulties with putting these policies into practice and keeping them in place in the face of a pandemic surfaced. Developing efficient and focused fiscal measures was made extremely difficult by the pandemic's dynamic nature (Dender, O'Reilly & Perren, 2020). It was difficult to precisely tailor interventions to the changing needs of businesses and households when policies were being implemented in an unpredictable environment with fluctuating lockdowns and containment measures. 

In conclusion, the UK and Germany utilized different approaches to monetary and fiscal policy in response to containing the COVID-19 pandemic. Businesses and families received instant relief from the UK's strict monetary policies and quick implementation of fiscal aid. Germany, on the other hand, placed more emphasis on long-term fiscal support and stronger monetary backing, especially with an unusual VAT cut meant to boost immediate consumer spending. Although the policies of both nations helped their economies, differences in their efficacy were apparent. The UK's swift action, particularly in the form of income support and furlough plans, prevented a severe recession and lessened the immediate economic collapse. In contrast, unlike its effective fiscal strategies, Germany's VAT reduction was successful in increasing immediate consumption but failed to affect inflation expectations. The volatility of the pandemic caused difficulties in both countries' policy implementation, which affected its effectiveness. 

References 

Dender, K. V., O'Reilly, P., & Perren, S. (2020). Tax and fiscal policy in response to the coronavirus crisis: strengthening confidence and resilience. Intertax, 48(8), 736-742. 

Hoang, D., Weber, M., & D’Acunto, F. (2020, June 8). Unconventional fiscal policy to exit the COVID-19 crisis. CEPR. https://cepr.org/voxeu/columns/unconventional-fiscal-policy-exit-covid-19-crisis