Who Will Recover Faster From the Virus? Europe or the U.S.?

0
22

BRUSSELS — After the devastating financial crisis of 2008 and 2009, the United States recovered much more quickly than Europe, which suffered a double-dip recession. This time, many economists say that Europe may have the edge.

The main reason America did well was the rapid response of the government and the flexible nature of the American economy, quick both to fire workers but also to hire them again. Europe, with built-in social insurance, tries to keep workers from layoffs through subsidies to employers, making it harder to fire and more expensive to rehire.

But this is a different kind of collapse, a mandated shutdown in response to a pandemic, driving down both supply and demand simultaneously. And that difference creates the possibility that the European response, freezing the economy in place, might work better this time.

“It’s an important debate,’’ said Jean Pisani-Ferry, a senior economist with Bruegel in Brussels and the Peterson Institute for International Economics in Washington. “This isn’t a normal recession, and there’s a lot you don’t know, especially if the virus comes back.’’

ImageMilan in April. Streets in Italy and elsewhere in Europe were often deserted as the countries imposed strict lockdowns.
Credit…Alessandro Grassani for The New York Times

By now, the coronavirus has turned the world into a giant laboratory of competing systems, each with its own way of fighting the virus and mitigating its economic damage. The contrast between Europe and the United States has been particularly stark.

Much of Europe resorted to strict lockdowns that mostly beat back the virus but capsized economies. In the United States, President Trump has prioritized getting the economy moving even as infections multiply.

Nearly everywhere governments had to step in with support as the emphasis shifted to relief and recovery. The common denominator is debt. The International Monetary Fund is forecasting that global debt will increase this year by 19 percent relative to gross domestic product.

But the contrast is not only about different systems. It is also about different wagers on how the pandemic will proceed — which will make all the difference to how long government relief can be sustained.

Already the different approaches are yielding different outcomes, not only in terms of infections and deaths — where the United States leads the world — but also jobs, with unemployment soaring in U.S. while it remains largely stable in Europe.

Image

Credit…Eve Edelheit for The New York Times

The United States has provided an early burst of funds for taxpayers and company support, but is effectively leaving it up to the market to reallocate jobs.

European governments, faced with an artificial shutdown, rather than a traditional fiscal crisis, have chosen to try to “freeze” their economies, in the hope of resuming them quickly.

They have bet on a fairly rapid recovery, opting to try to preserve jobs as much as possible through wage subsidies, often up to 80 percent of salary, and for part-time work.

But if the pandemic goes on too long, or returns in an extended second wave, European governments are unlikely to extend such support for much longer.

Already, said Mr. Pisani-Ferry, “everyone is pulling back a bit.” Some plans were very generous and “there is a question of balance — you want to avoid fraud and avoid companies keeping people on furlough if there’s no chance of rehiring them.’’

Many European countries have adopted what is known in Germany as ‘‘kurzarbeit,’’ in which firms promise not to lay anyone off but to share the work, while the government makes up much of the lost income.

“So far Europe is doing quite well, with a huge increase in unemployment in the U.S. and not so much here,’’ said Guntram Wolff, director of Bruegel, an economic think tank.

“If what we see is temporary, if we return to an economic system much like before, then kurzarbeit is the right response,’’ he said. ‘‘But if you think there will be longer-lasting shifts, if you need to reallocate, then the U.S., which is more agile, may be better off.’’

Image

Credit…Laetitia Vancon for The New York Times

Initial American spending was massive — up to $2.7 trillion in March and April (about 13 percent of gross domestic product) to provide economic relief to individuals, firms and states. It was the largest economic stimulus in American history. It was also several times bigger than Europe’s package, which in France, for example, was only 2 percent, Mr. Pisani-Ferry said.

Still, “the European response was better — simpler and more effective in terms of the use of public funds,’’ he said.

The reason is Europe’s existing social welfare system. Its “automatic stabilizers’’ kick in to support the poor and unemployed, without the need, as in the United States, to pass ad hoc legislation.

The American response was a broad rather than targeted attack, with large amounts of money handed out quickly but indiscriminately and thus inefficiently by the Treasury, which had no system in place to do otherwise.

The main point was to get money into the system so it did not shut down entirely, so consumer demand would continue. But the Treasury ended up giving a lot to those who did not need it — including to many dead people — and on a first-come, first-serve basis to employers, some of whom did not need the help.

But even that huge spending, largely targeted at individuals rather than employers, did not prevent massive layoffs. Washington is relying on unemployment insurance and increased those payments by $600 a week, but that runs out at the end of July. Without any certainty about what comes next, consumers will hesitate to spend, slowing any recovery.

Image

Credit…Bryan Denton for The New York Times

The rise in unemployment in America has been roughly five times that in France, Mr. Pisani-Ferry wrote in a paper with Jérémie Cohen-Setton. “As an immediate crisis response, the French (and European) approach undoubtedly offered a bigger bang for the buck.’’

But such European generosity to prop up the existing system may slow job growth compared to the more flexible, insecure American system, where it’s easier to hire and fire, argues Megan Greene, an economist at Harvard’s Kennedy School.

  • Frequently Asked Questions and Advice

    Updated June 30, 2020

    • What are the symptoms of coronavirus?

      Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days.

    • Is it harder to exercise while wearing a mask?

      A commentary published this month on the website of the British Journal of Sports Medicine points out that covering your face during exercise “comes with issues of potential breathing restriction and discomfort” and requires “balancing benefits versus possible adverse events.” Masks do alter exercise, says Cedric X. Bryant, the president and chief science officer of the American Council on Exercise, a nonprofit organization that funds exercise research and certifies fitness professionals. “In my personal experience,” he says, “heart rates are higher at the same relative intensity when you wear a mask.” Some people also could experience lightheadedness during familiar workouts while masked, says Len Kravitz, a professor of exercise science at the University of New Mexico.

    • I’ve heard about a treatment called dexamethasone. Does it work?

      The steroid, dexamethasone, is the first treatment shown to reduce mortality in severely ill patients, according to scientists in Britain. The drug appears to reduce inflammation caused by the immune system, protecting the tissues. In the study, dexamethasone reduced deaths of patients on ventilators by one-third, and deaths of patients on oxygen by one-fifth.

    • What is pandemic paid leave?

      The coronavirus emergency relief package gives many American workers paid leave if they need to take time off because of the virus. It gives qualified workers two weeks of paid sick leave if they are ill, quarantined or seeking diagnosis or preventive care for coronavirus, or if they are caring for sick family members. It gives 12 weeks of paid leave to people caring for children whose schools are closed or whose child care provider is unavailable because of the coronavirus. It is the first time the United States has had widespread federally mandated paid leave, and includes people who don’t typically get such benefits, like part-time and gig economy workers. But the measure excludes at least half of private-sector workers, including those at the country’s largest employers, and gives small employers significant leeway to deny leave.

    • Does asymptomatic transmission of Covid-19 happen?

      So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement.

    • What’s the risk of catching coronavirus from a surface?

      Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks.

    • How does blood type influence coronavirus?

      A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study.

    • How many people have lost their jobs due to coronavirus in the U.S.?

      The unemployment rate fell to 13.3 percent in May, the Labor Department said on June 5, an unexpected improvement in the nation’s job market as hiring rebounded faster than economists expected. Economists had forecast the unemployment rate to increase to as much as 20 percent, after it hit 14.7 percent in April, which was the highest since the government began keeping official statistics after World War II. But the unemployment rate dipped instead, with employers adding 2.5 million jobs, after more than 20 million jobs were lost in April.

    • How can I protect myself while flying?

      If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.)

    • What should I do if I feel sick?

      If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others.


“Labor market flexibility creates more opportunities for U.S. workers, usually leading to a faster recovery after a downturn,’’ she wrote.

That has helped America bounce back faster in traditional recessions, but this is a different kind of recession, a sudden freeze with no obvious exit.

“The United States had a much larger fiscal stimulus, but as usual, fewer automatic stabilizers, so the discretionary part was bigger,’’ said Lucrezia Reichlin, professor of economics at London Business School. “So in America there is a bigger debate about who is winning and who is losing.’’

Jacob Funk Kirkegaard of the Peterson Institute for International Economics pointed out that because most Europeans don’t have to worry about getting their salaries, the “lockdown was also easier to sustain.’’

That was especially true, he said, for “the critical eight weeks, mid-March to mid-May,’’ when Europe largely succeeded in snuffing out the rapid advance of the virus, which is continuing to spread in the United States at a record pace.

In the United States, “there are a lot of voices clamoring to open up or it will cost us the economy, since there are millions of Americans that need to work to put food on the table,’’ he said. “So Americans were willing to take chances that Europeans did not have to.’’

A lot will depend now on the course of the pandemic.

No doubt, Europeans continue to argue fiercely over the size and shape of their coronavirus recovery fund and how it will be distributed, but by now there is no doubt that the money will be in the pipeline.

Image

Credit…Samuel Aranda for The New York Times

If Europe is lucky and can engineer a broad, comprehensive lockdown but a short one, then whenever that money arrives next year will help the economy grow, especially if recovery is slow, weak and prolonged.

Last week, Christine Lagarde, the head of the European Central Bank, which stepped in with a massive program to guarantee new government debt, said: “We probably have passed the lowest point,’’ but given all the unknowns, “I say that with some trepidation.”

In the United States, on the other hand, the uncertainty of the government response is itself a factor. “Despite being one country,” Ms. Reichlin said, “the U.S. is coming out much more fragmented than Europe.’’

If American consumers remain apprehensive, or their unemployment benefits run out, or if there is a continued rise in illnesses or a second coronavirus wave, the American recovery could be short-circuited.

“We live with the idea that the U.S. has an ability to rebound that is almost unlimited,” Michel Duclos, a former French ambassador, told The Atlantic. “For the first time, I’m starting to have some doubts.”

LEAVE A REPLY

Please enter your comment!
Please enter your name here