“We will do this together:” Germany will continue subsidizing workers’ wages through the end of 2021

Our mission to help you navigate the new normal is fueled by subscribers. To enjoy unlimited access to our journalism, subscribe today.

It may have been intended as a short-term tool in Germany’s fight against the pandemic’s economic effects, but that’s not how the government’s massive wage-support program is panning out.

Now recognizing that it will take at least a couple years to get the economy back to pre-pandemic levels, Angela Merkel’s coalition government announced late Tuesday the extension of the current Kurzarbeit (“short time work”) scheme until the end of 2021.

The program allows cash-strapped companies to keep their workers on instead of letting them go—they can cut the workers’ hours, and the government will pay up to two-thirds of the wages for the missing time.

Kurzarbeit has actually been around since the 1950s, but the government drastically lowered barriers to access in mid-March, as lockdown shuttered businesses across the country. It is this expanded version of the program, which was initially supposed to last one year, that is being extended.

The extension won’t be paid for out of the €1.2 trillion ($1.4 trillion) the German government has already set aside for coronavirus support. Instead, the up-to-€10 billion that’s needed—a figure roughly equivalent to amount initially planned for this Kurzarbeit scheme—will come from the 2021 federal budget. (The government’s famous “black zero” no-new-debt policy is on hold for the next couple years.)

“We had large reserves at the Federal Employment Agency at the beginning of the crisis [which were] collected in better times,” Finance Minister Olaf Scholz told the ZDF TV station in a Wednesday interview. “But now we will need to help out using tax revenues.”

Scholz noted that Kurzarbeit had also been gradually extended during the great financial crisis of 2008-2009—the event where the program first truly proved its worth by preventing large-scale unemployment.

“Fastest to regain its footing”

“The fact that Germany was the fastest to regain its footing in the world during the last economic crisis is largely to do with Kurzarbeit,” he said. “All international experts agree on this…the German model of short-time work is now being used all over Europe and in other countries around the world.”

Indeed, some other countries did deploy similar concepts when the pandemic struck. But many of those programs, such as the U.K.’s Coronavirus Job Retention Scheme and France’s chômage partiel (“partial unemployment”) are now winding down or being heavily amended.

“Governments now have to strike a difficult balance,” said UBS global chief economist Paul Donovan in a Wednesday note to investors. “In the long term, it is economically efficient to preserve jobs in companies with a future. It is economically inefficient to preserve jobs in companies that are unlikely to survive the structural changes of the fourth industrial revolution.”

An enviable unemployment rate

Germany’s pre-pandemic unemployment rate was around 5%, and last month it was only at 6.4%. That’s a lot better than in the U.S., for example, where there is no equivalent to Kurzarbeit and where the unemployment rate was 10.2% in July. The Internal Revenue Service this week warned that the millions of jobs in America lost to the pandemic will never come back.

But, while Kurzarbeit has doubtless had a big positive effect, German companies have not been immune to the need for job cuts as the pandemic drags on.

Lufthansa, for example, put over 27,000 of its workers onto Kurzarbeit back in March, a move that helped it cut operational expenditure by a whopping 59%. But, with the aviation sector in tatters, the German flag carrier still went on to announce 22,000 job cuts.

In another measure intended to stop businesses going under, the German government on Tuesday agreed to freeze insolvency laws and to extend financial assistance to small businesses until the end of 2020.

Clemens Fuest, president of the prominent German economic thinktank Ifo, warned on Tuesday that it was too soon to extend Kurzarbeit all the way through the end of 2021, as the situation may have improved by next spring.

But Scholz said in his Wednesday interview that the extension was a good idea. “Many companies want to know, are we going to work with them until the end of the crisis? Can they take the risk of holding onto their workers? Now they have the answer: Yes, we will do this together,” he said.

More coronavirus coverage from Fortune:

• WHO chief warns the world: Don’t fall prey to COVID “vaccine nationalism”
• What makes the latest coronavirus testing process, developed by Yale, so promising
• Commentary: Why empowering frontline workers is a key element to a safe reopening
• Urinals and toilets may spread COVID-19, adding fuel to the mask debate
• Depression symptoms among the employed in the U.K. have more than doubled since the start of the pandemic