Uncategorized

Europe’s Recession Contrasts Economic Fortunes of U.S. Expansion

europes-recession-contrasts-economic-fortunes-of-u-s-expansion

Economic reports released this week on both sides of the Atlantic showed very different images of the United States and Europe recovering from the pandemic. The lesson: Along with vaccines, it pays to release enormous amounts of public money in the face of a food-destroying health crisis.

Europe provided less relief and fell into a so-called double-dip recession in the first three months of the year. That reality was confirmed on Friday by an official estimate that the euro-zone economy contracted 0.6 percent.

It did so a day after the United States announced its economy had grown 1.6 percent over the same period after significant public spending to stimulate growth.

The recession in the 19 countries that share the euro currency is a reflection of far less aggressive stimulus spending and botched vaccine safeguard efforts that have faced persistent restrictions on daily life in many large economies.

“It’s pretty hard to see growth when most European countries are still facing constraints,” said Ángel Talavera, senior euro-zone economist at Oxford Economics in London. “The USA will continue to grow this year. The sheer amount of fiscal stimulus will trigger a boom. “

Nonetheless, economic growth numbers are a snapshot of the past and the last few weeks have shown encouraging signs that Europe is already on the mend. The alarming spread of the coronavirus in major economies like Germany and France has slowed as factories revived production.

More and more people are traveling through European cities eager to spend money they saved at home during the worst pandemic – and that could suggest a sharp spike in consumption as life returns to a semblance of normalcy.

“We are already where the arrows have shown again,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Oslo.

The German economy contracted 1.7 percent from January to March, but that was better than expected, leading some economists to forecast a faster recovery in Europe’s largest economy.

Italy and Spain fell much less – 0.4 percent in Italy and 0.5 percent in Spain. France grew a modest 0.4 percent, despite a new challenge facing its prospects in the form of new pandemic restrictions imposed by the government in April.

The initial lockdowns last year penalized European economies and brought much of business to a standstill. However, the current restrictions are calibrated to allow a better understanding of the spread of the virus. Instead of closing their doors all the way, restaurants in some countries serve meals on terraces and place take-away orders. Roofers, joiners and other craftsmen have resumed their work as long as they can stay outside.

“We have learned to deal with the pandemic,” said Dhaval Joshi, chief strategist at BCA Research in London. “We adapt.”

Updated

April 30, 2021, 9:52 p.m. ET

Vaccination rates are increasing across Europe, a trend likely to be driven by the recent European Union agreement to secure Pfizer’s doses.

Most economists and the European Central Bank assume that the euro zone will expand rapidly in the further course of 2021 and achieve growth of more than 4 percent for the year as a whole.

Even in the most hopeful scenario, Europe’s recovery is a few months behind the United States, reflecting their different approaches to economic trauma.

According to the International Monetary Fund, the United States has spent 25 percent of its national economic output on pandemic-related stimulus programs and aid programs since last year. This corresponds to 10 percent in Germany and less in France, Italy and Spain.

Much of the recovery in the United States was fueled by federal government stimulus measures spent on automobiles, furniture, exercise equipment, and other large purchases. American spending on these so-called durable goods rose 41 percent on an annual basis in the first three months of 2021.

The nations of the European Union – which include the euro zone and eight other countries – are currently debating proposals to distribute funds from a pandemic rescue fund totaling 800 billion euros, or $ 968 billion. This money should ultimately fuel growth, but the process contrasts with typically fragile European politics.

Finland, which tends to be frugal, has halted the disbursement of demands for conditions for the use of the money. Further delays threaten to prolong the downturn in southern European economies that are particularly dependent on tourism, including Greece, Italy, Spain and Portugal.

Any comparison to America’s management of the pandemic must take into account the fact that Europe started the crisis with far broader social programs to support people in difficulty and then took a different approach to minimizing the damage. While the United States directed cash to people who had lost incomes, many European countries capped spikes in unemployment by heavily subsidizing the wages of companies that agreed to keep their workers through the lockdowns.

The contrasting pace of economic recovery in Europe and the United States reflects fundamental differences in the invigorating values ​​and structures of their societies.

The American economy is a study of inequality where risks and opportunities are prone to extremes and failure can often lead to disaster, as unemployment often separates people from their health insurance.

Europe remains a relative bastion of social democracy, paying higher taxes on national health systems, along with programs that automatically help those who lose their jobs.

In the United States, if a breadwinner in a family of two parents and two children loses a job six months later, they are living 28 percent of their previous income, according to the Organization for Economic Cooperation and Development. The corresponding family in Germany retains 75 percent of their previous income – a reflection of the country’s far more generous social safety net – while the same household in Denmark can count on 90 percent of its original income.

In short, the United States is far more dependent on economic growth and emergency aid when problems arise, while European countries generally seek to contain volatility. This is part of the explanation why the American political system has mobilized faster to distribute far larger sums of stimulus spending: because the consequences, if not done, are far more punitive in the United States.

“Europe has more insurance systems,” said Ms. Haugland, the economist at DNB Markets. “You don’t fall as hard, but you also don’t bounce off as hard.”

Source

0 Comments
Share

Robert Dunfee