LONDON — The United States is recovering faster from the economic shock caused by the coronavirus pandemic than countries in the European Union.
The sheer amount of fiscal stimulus in the United States has been a critical driver in ensuring that the largest economy in the world resurfaces quickly. But there are other reasons allowing the U.S. to return to pre-crisis ouput levels much faster than its EU counterparts.
Silvia Dall’Angelo, senior economist at Federated Hermes told CNBC in March, cited an “institutional problem” in the European Union as one of the main issues hindering its recovery. As such, she said, “there are signs that the U.S. will recover much faster than the EU.”
Though European nations surprised financial markets in July of 2020, by coming together and approving an EU-wide fiscal stimulus plan that included borrowing 750 billion euros ($892 billion) from public markets, this money is not yet available to the 27 member states.
A series of legislative approvals are needed before the European Commission, the executive arm of the EU, can actually tap the markets. It is hoped this can take place this summer, but Germany’s constitutional court brought further uncertainty to the process last week by halting the approval of the program, which ultimately could delay disbursements further.
By contrast, U.S. President Joe Biden managed to get $1.9 trillion in fiscal stimulus approved after less than two months in office.
According to the International Monetary Fund, the U.S. is well placed not only return to — but also to exceed — its pre-pandemic growth rate this year.
But it’s a different story in the euro zone, made up of the 19 countries that share the euro.
One of the biggest differences between the U.S. and the bloc is that the economic setback last year was much higher in the euro area. Whereas the U.S. economy contracted by 3.5%, the euro zone economy shrunk by almost twice as much.
Given how deep the shock was for them last year, euro nations will naturally struggle more to recover in 2021. Its gross domestic product (GDP) is seen expanding by 4.4% this year, while U.S. growth is expected to reach 6.4%.
Zsolt Darvas, a senior fellow at the Brussels-based think tank Bruegel, highlighted to CNBC that the Covid vaccination progress was “much stronger” in the U.S. compared to Europe, and therefore the U.S. economy was likely to reopen fully sooner than those in Europe.
The latest vaccination data show that about 50% of the population in the United States has received at least one dose of a Covid-19 vaccine. Meanwhile, only about 20% of the population in the European Union have had their first shot, according to Our World in Data.
Many people in developed nations have managed to save more since the pandemic emerged compared to previous years. This is in part due to governments’ stimulus measures, but also because consumer spending has been severely limited, with non-essential retail, leisure activities and travel off limits for months.
At the end of the third quarter of 2020, the average personal savings rate in the U.S. stood at 15.7%. This was lower than a peak of 25.8% at the height of the pandemic, but still far higher than the average savings rate prior to 2020.
Meanwhile, the household saving rate in the euro area came in at 17.3% by the end of September, according to the Eurostat. This level of savings was lower than a 2020 peak, but was also much higher compared with pre-pandemic levels.
Federated Hermes’ Dall’Angelo said the U.S.’ faster vaccine rollout will allow consumers to spend their additional cash sooner.
“The safe re-opening of the economy is therefore a precondition to unlock pent-up demand and a potential unwinding of precautionary savings. In this respect, the U.S. is in a much stronger position than the euro zone,” she told CNBC.
Though it remain uncertain how people will choose to spend their additional savings — if at all — “in general, saving rates tend to be structurally higher in the euro zone than in the U.S., meaning that the scope for a consumption boom is more limited in the euro zone compared to the U.S.,” Dall’Angelo added.
There has been a huge focus both in the U.S. and EU to avoid swathes of layoffs. This has led to wage subsidies, unemployment benefits and other support measures.
As a result, unemployment has been somewhat contained and, in both regions, the jobless rate stayed below its peak during the global financial crisis of 2008.
However, the number of unemployed people is expected to improve faster in the U.S. than in the euro zone, even though they experienced similar levels of joblessness last year. Unemployment is set to fall to 5.8% this year in the U.S., whereas it is seen rising slightly in the euro area to 8.7% from 7.9% in 2020.
Experts are concerned that the moment European governments lift their recent labour-market-friendly policies, many businesses could become insolvent and more workers will likely become unemployed.