Welfare states and strong public health systems help Europe to edge US in recovery
From Germany to Greece flare-ups are contained by localised restrictions while economies have reopened steadily
06 July 2020 - 10:59
byFerdinando Giugliano
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Visitors ride escalators after entering the reopened Louvre Museum in Paris, France, on Monday, July 6, 2020. Picture: BLOOMBERG/Cyril Marcilhacy
After the great recession, the US economy rebounded faster and stronger than the eurozone, raising doubts over the effectiveness of the “European social model.” As Europe emerges from the first wave of the Covid-19 epidemic in better shape than the US, its combination of welfare states and strong public health systems suddenly seems appealing again.
The US is still struggling to contain outbreaks in several states from Texas to Florida, whose health-care systems are being pushed to the brink. The federal government has failed to articulate a unified message for the country, as state governors have taken conflicting decisions on the length and strictness of their lockdowns.
Meanwhile, in most European countries, the situation appears under control. From Germany to Greece, countries are dealing with a handful of flare-ups, but they’re being contained by localised restrictions. Governments have reopened their economies steadily, without causing a new surge of infections. The sacrifices of months of lockdown appear to be paying off for now.
Europe’s economy also appears to be improving. The eurozone is in the middle of a very steep recession, and the European Commission expects the bloc’s GDP to fall nearly 8% in 2020. The difficulties in other parts of the world in managing the pandemic will weigh on exports — and especially on tourism. But restaurants, bars and shops don’t seem to be heading for a mass round of fresh lockdowns, unlike in the US. Domestic demand, from consumers and governments, should keep recovering as long as the pandemic is kept in check.
Europe’s labour market institutions are cushioning the blow. Countries from Germany and France to Italy and the UK have generous furlough schemes, in which governments are subsidising workers for the hours they’re not employed. Companies can keep more employees on their payroll without triggering a downward spiral of unemployment and falling demand. As the economy restarts, businesses don’t have to go through the long, costly process of rehiring workers. The biggest problem for Europe will be making sure this doesn’t turn into never-ending life support for unviable companies and industries.
Medical crisis
The experience of the eurozone and US labour markets since the pandemic shows the difference of the two approaches. The US unemployment rate stood at 11.1% in June, up from 3.5% in February. The actual number was probably worse. Jason Furman and Wilson Powell III at the Peterson Institute of International Economy believe the “realistic unemployment rate” was 13% in June, correcting for misclassification errors.
The data don’t take into account the worsening medical crisis in the second half of June that has prompted a number of states to reverse their reopening plans. The euro area unemployment rate has risen much less: It climbed to 7.4% in May, up from 7.2% in February.
This divergence is the result of the eurozone’s use of furlough schemes, which have covered more than 35-million people in the bloc’s five largest economies. A group of economists at the European Central Bank found that these salary-support programmes buffered the impact of the epidemic on households’ disposable income. In the absence of these benefits, the drop of worker income across the euro area would have been 22% during the lockdowns. Thanks to the governments’ measures, it was only 7% — though there were differences between member states, with Germans receiving the most help.
The problem for Europe is that these schemes are very expensive and provide perverse incentives for companies and workers, who may be in no hurry to return to the their jobs. Employers will still need to adapt to the new economic reality post-Covid, whether that’s downsizing to reflect lower demand or changing their business models. The longer the furloughs last, the more this process will be delayed. That’s especially true in countries such as Italy, which have banned companies from firing workers.
This doesn’t mean furloughing is a bad idea. But governments should accompany it with active labour market policies, such as retraining those who are likely to become unemployed. In the past, these areas of spending have been neglected in those countries that have been worst affected by the crisis, such as Italy and Spain. Their reopenings might be especially tough.
The eurozone deserves two cheers for its health-care and labour institutions, which have helped it to weather the pandemic better than the US. However, it needs to ensure it doesn’t merely prop up zombie companies. Freezing the jobs market makes sense in the short term, but it’s not a viable long-term strategy.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Welfare states and strong public health systems help Europe to edge US in recovery
From Germany to Greece flare-ups are contained by localised restrictions while economies have reopened steadily
After the great recession, the US economy rebounded faster and stronger than the eurozone, raising doubts over the effectiveness of the “European social model.” As Europe emerges from the first wave of the Covid-19 epidemic in better shape than the US, its combination of welfare states and strong public health systems suddenly seems appealing again.
The US is still struggling to contain outbreaks in several states from Texas to Florida, whose health-care systems are being pushed to the brink. The federal government has failed to articulate a unified message for the country, as state governors have taken conflicting decisions on the length and strictness of their lockdowns.
Meanwhile, in most European countries, the situation appears under control. From Germany to Greece, countries are dealing with a handful of flare-ups, but they’re being contained by localised restrictions. Governments have reopened their economies steadily, without causing a new surge of infections. The sacrifices of months of lockdown appear to be paying off for now.
Europe’s economy also appears to be improving. The eurozone is in the middle of a very steep recession, and the European Commission expects the bloc’s GDP to fall nearly 8% in 2020. The difficulties in other parts of the world in managing the pandemic will weigh on exports — and especially on tourism. But restaurants, bars and shops don’t seem to be heading for a mass round of fresh lockdowns, unlike in the US. Domestic demand, from consumers and governments, should keep recovering as long as the pandemic is kept in check.
Europe’s labour market institutions are cushioning the blow. Countries from Germany and France to Italy and the UK have generous furlough schemes, in which governments are subsidising workers for the hours they’re not employed. Companies can keep more employees on their payroll without triggering a downward spiral of unemployment and falling demand. As the economy restarts, businesses don’t have to go through the long, costly process of rehiring workers. The biggest problem for Europe will be making sure this doesn’t turn into never-ending life support for unviable companies and industries.
Medical crisis
The experience of the eurozone and US labour markets since the pandemic shows the difference of the two approaches. The US unemployment rate stood at 11.1% in June, up from 3.5% in February. The actual number was probably worse. Jason Furman and Wilson Powell III at the Peterson Institute of International Economy believe the “realistic unemployment rate” was 13% in June, correcting for misclassification errors.
The data don’t take into account the worsening medical crisis in the second half of June that has prompted a number of states to reverse their reopening plans. The euro area unemployment rate has risen much less: It climbed to 7.4% in May, up from 7.2% in February.
This divergence is the result of the eurozone’s use of furlough schemes, which have covered more than 35-million people in the bloc’s five largest economies. A group of economists at the European Central Bank found that these salary-support programmes buffered the impact of the epidemic on households’ disposable income. In the absence of these benefits, the drop of worker income across the euro area would have been 22% during the lockdowns. Thanks to the governments’ measures, it was only 7% — though there were differences between member states, with Germans receiving the most help.
The problem for Europe is that these schemes are very expensive and provide perverse incentives for companies and workers, who may be in no hurry to return to the their jobs. Employers will still need to adapt to the new economic reality post-Covid, whether that’s downsizing to reflect lower demand or changing their business models. The longer the furloughs last, the more this process will be delayed. That’s especially true in countries such as Italy, which have banned companies from firing workers.
This doesn’t mean furloughing is a bad idea. But governments should accompany it with active labour market policies, such as retraining those who are likely to become unemployed. In the past, these areas of spending have been neglected in those countries that have been worst affected by the crisis, such as Italy and Spain. Their reopenings might be especially tough.
The eurozone deserves two cheers for its health-care and labour institutions, which have helped it to weather the pandemic better than the US. However, it needs to ensure it doesn’t merely prop up zombie companies. Freezing the jobs market makes sense in the short term, but it’s not a viable long-term strategy.
Bloomberg
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