LONDON – The United States is recovering faster from the economic shock caused by the coronavirus pandemic than the countries of the European Union.
The sheer amount of fiscal stimulus in the United States was a key factor in making the world’s largest economy emerge quickly. But there are other reasons that enable the US to return to pre-crisis spending much faster than its EU counterparts.
Silvia Dall’Angelo, chief economist at Federated Hermes, told CNBC in March that an “institutional problem” in the European Union was one of the main problems hindering its recovery. As such, she said: “There are signs that the US will recover much faster than the EU.”
Although European nations surprised the financial markets in July 2020 by meeting and approving an EU-wide recovery plan that included borrowing € 750 billion from public markets, that money is not yet available to the 27 member states.
A number of legislative approvals are required before the European Commission, the EU’s executive, can actually enter the markets. Hopefully that can happen this summer, but the German Constitutional Court added further uncertainty to the process last week by stopping approving the program, which could ultimately further delay payouts.
In contrast, US President Joe Biden managed to receive fiscal incentives of $ 1.9 trillion retrospectively less than two months in office.
According to the International Monetary Fund, the US is not only well positioned to – but also to surpass its pre-pandemic growth rate this year.
In the euro zone, which is made up of the 19 countries that share the euro, things are different.
One of the biggest differences between the US and the bloc is that the economic setback was much greater in the euro area last year. While the US economy contracted 3.5%, the eurozone economy almost doubled.
Given the depth of the shock for them last year, the euro countries will of course have more difficulties recovering in 2021. Gross domestic product (GDP) is expected to grow 4.4% this year, while US growth is expected to reach 6.4%.
Zsolt Darvas, Senior Fellow of the Brussels-based think tank Bruegel, told CNBC that the advances in Covid vaccination in the US are “much stronger” compared to Europe and the US economy is therefore likely to be full again sooner than in Europe will open.
The latest vaccination data show that the total number of doses given per 100 people in their respective populations is much higher in the US than in the EU. The percentage of the total US population who has received at least one dose of vaccine is currently just over 30%.
Many people in developed countries have saved more since the outbreak of the pandemic compared to previous years. This is partly due to government stimulus measures, but also due to the fact that consumer spending has been severely curtailed and no major retail, leisure and travel restrictions have been in place for months.
At the end of the third quarter of 2020, the average personal savings rate in the US was 15.7%. This was lower than a high of 25.8% at the height of the pandemic, but still far higher than the average savings rate before 2020.
According to Eurostat, the household saving rate in the euro area was 17.3% at the end of September. That level of savings was lower than a 2020 high, but also much higher than before the pandemic.
Federated Hermes’ Dall’Angelo said the faster adoption of vaccines in the US will allow consumers to spend their extra money sooner.
“The safe reopening of the economy is therefore a prerequisite for unleashing pent-up demand and a possible release of precautionary savings. In that regard, the US is in a much stronger position than the euro zone,” she told CNBC.
While it remains uncertain how people will spend their extra savings – if at all – savings rates in the euro area are generally structurally higher than in the US, meaning the scope for a consumption boom is limited compared to the euro area USA, “added Dall’Angelo.
In both the US and the EU, a great deal of emphasis has been placed on avoiding layoffs. This has led to wage subsidies, unemployment benefits and other support measures.
As a result, unemployment has been somewhat limited and both regions have remained below their highs during the global financial crisis in 2008.
However, the US unemployment rate is expected to improve faster than the euro area, despite being similarly unemployed last year. In the US, unemployment is expected to fall to 5.8% this year, while in the euro area it will increase slightly from 7.9% in 2020 to 8.7%.
Experts fear that the moment European governments end their latest labor market friendly policies, many companies will default and likely more workers will become unemployed.
Correction: This story has been updated to correctly reflect the percentage of the total US population who received at least one dose of coronavirus vaccine.