Europe takes slow lane to recovery as stimulus outpaced by US


JPMorgan Chase & Co estimates the “fiscal thrust” – the boost from discretionary government spending minus the drag of expiring tax breaks and support measures – will add 1.8% to US output this year. For the eurozone, it’ll subtract 0.1%.

BRUSSELS: While the United States 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 US$1.9 trillion stimulus bill, if congressional leaders pass the full amount, would take his administration’s spending in 2021 to more than three times as much as eurozone countries have planned, according to UniCredit SpA.

JPMorgan Chase & Co estimates the “fiscal thrust” – the boost from discretionary government spending minus the drag of expiring tax breaks and support measures – will add 1.8% to US output this year. For the eurozone, it’ll subtract 0.1%.

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 the currency bloc.

Europe’s go-slow is partly a result of its unwieldy makeup. The European Union’s (EU) 27 sovereign governments set their own fiscal policies, it took months of negotiations last year to agree on a common €750bil (US$910bil) recovery fund. Proposals for how to spend the money are still being processed, and funds probably won’t start being distributed until the second half of the year.

Such careful 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 do 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 that we need.”

The EU’s recovery fund, combined with a €1.1 trillion multi-year budget, is a breakthrough package for the union. 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 largest-ever stimulus package, the recovery fund is financed by jointly backed bonds – the first time the EU has agreed to such a measure. It’s temporary, but European Central Bank officials hope it will ultimately lead to a permanent joint fiscal capacity, effectively the equivalent of the US federal budget.

The bloc has long struggled with smoothing out economic differences between countries, and the pandemic has exposed that flaw once again. National fiscal programmes have been far 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 though. Erik Nielsen, UniCredit’s chief economist, says the difference in spending plans compared to the US is “mind-boggling” and the eurozone approach is “severely inadequate”. It’ll lead to a muted recovery, higher unemployment, deeper economic scars and weak inflation, he said in his report.

Such an outcome would be familiar for the eurozone. Fixation on austerity to reduce debts after the 2008-2009 global financial crisis, rather than boosting growth through consumption, condemned the bloc to a sluggish recovery which turned into a sovereign debt crisis and double-dip recession. Nielsen cited the so-called output gap as a key indicator of the problem. That gauge of unused economic potential is hard to measure, but is considered to be bigger in the EU than in the US. ─ Bloomberg

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