Contrasting economic data released on both sides of the Atlantic this week sends a simple but powerful message: It pays to free up huge amounts of public money and vaccines in the face of a deadly pandemic that destroys livelihoods.
Europe has committed to less aid and has spent the first three months of the year caught in the second stage of a so-called double-dip recession, a reality confirmed on Friday by an official estimate showing that the he eurozone economy contracted by 0.6%.
It came a day after the United States revealed that its economy grew 1.6% over the same period thanks to substantial government spending to boost growth.
The recession in the 19 countries that share the euro reflects much less aggressive stimulus spending and a botched effort to obtain vaccines that has left many major economies struggling with continued restrictions on daily living.
“It’s pretty hard to see growth when most European countries still face restrictions,” said Ángel Talavera, senior eurozone economist at Oxford Economics in London. “The United States will grow more this year. The amount of fiscal stimulus will create a boom. “
Yet economic growth figures are by nature a snapshot of the past, and recent weeks have produced encouraging signs that Europe is already on the mend. The alarming spread of the coronavirus in large economies like Germany and France has moderated, as factories have restarted production.
Growing numbers of people are moving to European cities, bringing back money saved while being confined to their homes at the worst of the pandemic – a reality that may portend a surge in consumer spending as life recovers. semblance of normality.
“We are already where the arrows point once again,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Oslo.
The German economy shrank 1.7% from January to March, but it was better than expected, prompting some economists to forecast a faster recovery in Europe’s largest economy.
The economies of Italy and Spain shrank by much smaller proportions – 0.4% in Italy and 0.5% in Spain. The French economy grew by a modest 0.4%, although its outlook faces a new challenge in the form of new pandemic restrictions imposed in April by the government.
The first lockdowns last year punished European economies, putting an end to large swathes of commercial life. But the current restrictions are calibrated to reflect a better understanding of how the virus spreads. Rather than completely closing their doors, restaurants in some countries serve meals on patios and distribute take out orders. Roofers, carpenters and other skilled trades have returned to work, as long as they can stay outside.
“We’ve kind of learned to live with the pandemic,” said Dhaval Joshi, chief strategist at BCA Research in London. “We adapt to it.”
Vaccination rates are increasing across Europe, a trend likely to be advanced by the European Union’s recent agreement to obtain doses of Pfizer.
Most economists and the European Central Bank expect the euro area to grow rapidly for the remainder of 2021, generating growth of over 4% for the full year.
Yet even in the most promising scenario, Europe’s recovery lags several months behind the United States, reflecting their different approaches to economic trauma.
Since last year, the United States has released additional government spending representing 25% of its national economic output for pandemic-related stimulus and relief programs, according to the International Monetary Fund. This compares to 10% in Germany and less in France, Italy and Spain.
To a large extent, the US recovery has been propelled by people using their federal stimulus checks to buy cars, furniture, exercise equipment, and other major purchases. US spending on these so-called durable goods increased at an annualized rate of 41% in the first three months of the year.
Countries in the European Union – which includes the eurozone and eight other countries – are currently debating proposals to distribute funds from a € 800 billion pandemic rescue fund, or $ 968 billion. This money should ultimately stimulate growth, but the process clashes with the generally agitated politics of Europe.
Finland, which tends to be frugal, has delayed disbursements by demanding conditions for the use of the money. Further delays threaten to prolong the recession in the economies of southern Europe which are particularly dependent on tourism, including Greece, Italy, Spain and Portugal.
Any comparison with America’s handling of the pandemic must take into account that Europe started the crisis with much more comprehensive social programs to help those in difficulty, and then took a different approach to minimize the damage. While the United States has earmarked money for those affected by the pandemic, many European countries have contained the spike in unemployment by heavily subsidizing the wages of companies that have agreed to retain their workers during lockdowns.
The contrasting pace of economic recovery in Europe and the United States reflects fundamental differences in the values and structures that drive their societies.
The American economy is a study of inequality, with risks and rewards stretching to extremes, and failures often capable of precipitating disaster, as unemployment frequently separates people from their health insurance policies.
Europe remains a relative stronghold of social democracy in which higher levels of taxation fund national health care systems as well as programs that automatically help those who lose their jobs.
In the United States, a family of two parents and two children whose one of the breadwinners loses their job six months later, subsist on 28% of their previous income, according to data from the Cooperation Organization and economic development. The equivalent family in Germany retains 75 percent of its previous income – a reflection of the country’s much more generous social safety net – while the same household in Denmark can rely on 90 percent of its original income.
In short, the United States is much more dependent on economic growth and emergency relief injections if something goes wrong, while European countries generally seek to limit volatility. This partly explains why the American political system has mobilized more quickly to distribute much larger sums of stimulus spending: because the consequences of not doing so are much more painful in the United States.
“Europe has more insurance schemes,” said Ms Haugland, economist at DNB Markets. “You don’t fall as hard, but you don’t bounce so sharply.”