Europe economy lagging behind major economies like U.S. and China on pandemic recovery
Authors: Ashna Gupta & Bryce Yeo
Region Head: Sauradeep Bhattacharyya Editor: Harsh Didwania
In its January 2021 forecast, the International Monetary Fund predicted that Europe will severely lag behind the US and China in terms of growth and economic performance this year (International Monetary Fund, 2021). This article analyses the potential causes of this prediction and the impact it might have on the politics and economy of the continent. Furthermore, it ends with a set of recommendations for the European Union, in order to prevent the forecast from coming true.
Europe losing out in Covid-19 recovery
Europe’s uncertain outlook contrasts with other major economies like the United States. In the United States, where restrictions have been less stringent, a large fiscal stimulus package, and huge savings could unleash a wave of spending once vaccinations are widely deployed.
United States Covid-19 recovery
As of March 18, 2021, Bloomberg reports more than half of $410 billion in stimulus payments have been distributed to approximately 90 million households (Davison, 2021). Payments are being received mostly via direct deposits. With U.S. increasing government spending to help boost consumption and savings levels among businesses and consumers, real GDP growth is expected to leap. Whereas Europe’s temporary support to mitigate unemployment risks in an emergency (SURE) bond that aims to help people keep their job during the crisis. As of 16 March 2021, 16 member states have received a total of $74.68 billion in SURE support (European Council, 2021)
Vaccination between Europe and United States
The rollout gap between Europe and the United States has only widened. The 27 states of the EU have only given first doses to 8.3% of their combined population compared with 39% in the U.K. and 23% in the U.S., according to the Bloomberg Vaccine Tracker. Europe’s slow vaccine roll-out means its economic recovery could lag behind as the United States and Asia. One of the main causes of Europe’s slow rollout of Covid-19 vaccines was lower than expected supplies from AstraZeneca Plc. The company pointed out that Britain signed a deal three months before the EU, making it easier to ensure that production chains were in place and operating smoothly.
Source: Bloomberg Covid-19 Vaccine Tracker
To make matters worse, Europe’s sluggish vaccine roll-out was dealt another blow after Germany suspended the use of AstraZeneca Plc Covid-19 vaccines shot which were linked to cases of blood clots in adults. Similar reports followed from other European countries. According to the Economist, 16 european countries, including France and Italy, had called a pause in using the vaccine. Germany’s decision to hit the brakes came at a terrible time, setting back the vaccine rollout just as Europe confronts a new wave of infections that have led to many european countries reimposing or extending restrictions. Delays in inoculating people against the disease risks and prolonging pandemic lockdowns hampers the recovery for Europe.
Covid-19 has had a severe impact on the labour market of Europe with the highest decline in employment and total hours worked till date. The first half of 2020 alone led to a reduction of the labour force by 5 million. As of January 2021, the unemployment rate of Europe was 7.3% while that of the US, UK and China were 8.3%, 4.3% and 5% respectively (Worldbank, 2021). A delayed recovery from the pandemic could further aggravate this problem, forcing the young labour force to migrate to other countries with a higher job perspective. This would not only be detrimental for the economy but also be a major cause of population ageing, an issue already faced by countries such as Italy, Greece, Portugal, Finland, Germany and many others.
Moreover, private consumption makes up 54% of Europe’s GDP (Worldbank, 2021). Private consumption (or household final consumption expenditure) is the market value of all final goods and services purchased by the households of a region. With a continued loss in income, people will be forced to reduce their consumption, further shrinking the economy and depressing GDP growth.
As seen in the figure above, almost fifty percent of Germany, Italy, France and Spain’s population already believed that being a member of the EU had a neutral or negative impact on their country as of 2018 (Walsh, 2020).
A perception that the European Union is not handling the pandemic well either could be the last straw to make them opt out of the EU. For example, there is a growing support for anti-EU politicians in Italy who suggest that the country will be better off exiting the EuroZone (Amaro, 2021). Similarly, there is a growing belief that Germany, the largest and strongest economy of Europe, does not need to be part of the European Union (Bet, 2021). While there exist positives and negatives for both sides of this argument, actions taken by the EU in the near future will certainly play a huge role in deciding the outcome.
As the more transmissible B.1.1.7 Covid-19 variant spreads from the UK to other countries of Europe, it is essential for the EU to improve its vaccination rollout process. The current slowdown caused by lack of mass production and manufacturing glitches has already forced countries like Hungary, Austria and Denmark to look at alternate sources of vaccination from Russia and Israel.
While President Joe Biden plans on spending $1.9 trillion on the economic recovery of the United States, the European Union’s twenty seven sovereign governments have decided on a common 750 billion-euro ($910 billion) recovery fund. However the detailed plan of its use is yet to be decided. While taking this decision after careful consideration might lead to a well structured proposal, the delay in its implementation will continue to harm the economies of these countries. Some economists also believe that this package is extremely inadequate and will lead to a “muted recovery, higher unemployment, deeper economic scars and weak inflation.” In their opinion, instead of trying to reduce debt, the EU should focus on boosting the economy through an increase in consumption.
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