German state aid during pandemic proved most effective for micro and small enterprises, study finds

Government support provided to businesses in Italy and Spain during the coronavirus pandemic had the strongest positive impact on micro and small enterprises, according to a new study by the German Institute for Economic Research (DIW Berlin) in collaboration with the European Commission’s Joint Research Centre (JRC). The research examined the effects of state aid in the two countries, both of which were heavily affected by the pandemic and introduced extensive support programmes.

Two years after the pandemic began, micro and small enterprises that received government aid reported notably better outcomes than comparable businesses that did not benefit from support. In Italy, sales among supported businesses were more than four percent higher in 2022 compared to their unsupported counterparts. In Spain, the difference was 2.7 percent. In contrast, the study found no significant effects for medium-sized and large companies.

“The results demonstrate that temporary government support can play a key role in preserving economic structures during a crisis,” said Tomaso Duso, Head of the Business and Markets Department at DIW Berlin.

The study also highlighted an increase in investment among supported small businesses. In Spain, aided small enterprises expanded their total assets by 7.1 percent in 2020, while in Italy the increase was around five percent. Importantly, investment was directed not only towards physical assets but also towards intangible assets such as software and digital infrastructure. Many small firms used the period of disruption to modernise their operations and expand digital sales channels in response to the closure of in-person retail options during the pandemic.

Based on these findings, the study concludes that temporary, targeted aid is an effective tool for strengthening economic resilience, particularly for micro and small businesses. However, the authors caution against extending similar broad-based aid to large companies, citing limited effectiveness and increased risks of market distortion.

“Government aid can be valuable during acute crises if it remains targeted and temporary,” Duso explained. “Micro and small businesses, in particular, show measurable benefits from this support. By contrast, permanent or broad subsidies for large firms risk distorting markets and using public funds inefficiently.”

The study’s findings come at a time when the European Union is considering future policy directions under initiatives like the EU’s Clean Industrial Deal, raising questions about how state support should be structured to balance economic resilience with fair competition.