independent.ie– While the US rushes toward a blockbuster fiscal stimulus package to accelerate its recovery from the coronavirus crisis, much of Europe is pootling along in the slow lane.
President Joe Biden’s $1.9trn (€1.57trn) stimulus bill, if congress passes the full amount, would take his administration’s spending this year to more than three times what euro-area countries have planned.
As a consequence, most economists expect the US economy to reach its pre-pandemic size around the middle of 2021, roughly a full year before Europe.
JPMorgan Chase estimates the “fiscal thrust” – the boost from discretionary government spending minus the drag of expiring tax breaks and support measures – will add 1.8pc to US output this year. For the eurozone, it will subtract 0.1pc.
Europe’s go-slow is partly a result of its unwieldy makeup. The EU’s 27 governments set their own fiscal policies, and it took months of negotiations last year to agree on a common €750bn recovery fund.
Proposals for how to spend this money are being processed, and funds probably will not start being distributed until the second half of the year.
Such consideration has its benefits. Get it right, and the EU will have a well-structured suite of projects that enhance productivity and growth potential for years to come. Get it wrong, though, and the continent could be blighted for just as long.
“The question is what we want to achieve,” said Carsten Brzeski, an economist at ING Germany. “Do we want this short-term momentum or do we want to use the money to improve the structure of the economy in a sustainable way? In Europe, it’s the latter we need.”
The EU’s recovery fund, combined with a €1.1trn multi- year budget, is a breakthrough package for Europe.
The money will be spent between now and 2027, with more than half intended for “modernisation” such as digitisation and fighting climate change. Not only is it the EU’s biggest-ever stimulus package, the recovery fund is financed by jointly backed bonds – the first time the EU has agreed to such a measure.
It is temporary, but European Central Bank officials hope it will ultimately lead to a permanent joint fiscal capacity, effectively the equivalent of America’s federal budget.
The bloc has long struggled with smoothing out economic differences between countries, and the pandemic has exposed that flaw again. National fiscal programmes have been more generous in wealthy nations such as Germany than in weaker ones such as Italy and Spain.
Not everyone is convinced Europe has got it right.
Erik Nielsen, UniCredit’s chief economist, said the difference in spending plans compared with the US is “mind-boggling” and the eurozone approach is “severely inadequate.”
It will lead to a muted recovery, higher unemployment, deeper economic scars and weak inflation, he said.
Such an outcome would be familiar for the eurozone. Fixation on austerity to reduce debts after the 2008-2009 financial crisis, rather than boosting growth through consumption, condemned the bloc to a sluggish recovery that turned into a debt crisis and double-dip recession.
Nielsen cites the output gap as a key indicator of the problem. That gauge of unused economic potential is hard to measure, but is considered bigger in the EU than in the US at the moment. That means Europe should be doing more to boost its economy.
The International Monetary Fund estimates the US output gap was 3.2pc of gross domestic product last year and 5.1pc in the eurozone.
Some economists argue the vagaries of the output gap make it a poor foundation for policy decisions.
Maria Demertzis, deputy director at the Bruegel think-tank in Brussels, said European countries are right to focus on support for struggling parts of the economy and investment. Measures to boost consumption are not targeted enough, she said.
Experience from last year also indicates that European consumers will probably go out and spend as soon as they are allowed. Households are sitting on hundreds of billions of euro in savings they accumulated during lockdowns that could further fuel the recovery.
“Generous government support through the pandemic means European economies are set to rally once restrictions are lifted – a big chunk of slack will vanish, even without an extra fiscal boost,” said Jamie Rush, chief European economist at Bloomberg Economics. “In an environment of rising global yields, I see targeted stimulus offering the best value for money.”