Coronavirus Winners & Losers: Is the US or Europe More Resilient to Covid-19?

Written by | Thursday, August 6th, 2020

According to the popular narrative, the US and Europe represent different ways of managing market economies and democratic societies. The US has a smaller government, more dynamic markets, and a culture of individual responsibility. In Europe, taxes are high, better quality public services are available to all citizens, and more rigid labour markets provide greater protection for workers (at the price of higher unemployment). Also, the European response to the pandemic has demonstrated the advantages of well-funded states, and a high level of risk-sharing within countries. But Europe suffers from weak demand, the result of a failure to share enough risk between countries. Unless the EU’s recovery fund is the start of more permanent risk-sharing between EU member states, Europe’s South faces the prospect of a weak recovery and persistently high unemployment.

Europeans feel that their model has been vindicated by America’s handling of Covid-19 (and to a lesser extent, the struggles of the UK). Big, well-funded states appear to have controlled the spread of the virus more effectively, Kurzarbeit schemes have curtailed unemployment, and universal healthcare systems have largely coped with the sudden rise in people needing hospital treatment. On the US side, reasonable observers accept that Trump has given up on suppressing the virus – and that several (mostly Republican) state governors ended lockdown too early. But they point out that America’s world-leading medical scientists and drugs companies will be quicker to discover treatments and an effective vaccine. In the interim, while the US headline unemployment rate has skyrocketed, the country’s dynamism means that capital and labour will be more speedily deployed to sectors of the economy that are less constrained by social distancing, helping economic growth to return more rapidly.

But is this story about the differences between the US and European models true, and which is better placed to deal with the fallout of the pandemic? In fact, the differences between the two sides of the Atlantic are in some ways not as large as is commonly supposed. The US headline unemployment rate is misleading; many workers who are counted as unemployed are in fact temporarily furloughed, and US unemployment benefit has provided sufficient income support. For their part, European economies are better at reallocating resources and creating new jobs than is often assumed. But in other ways the differences are considerable. Poor and unhealthy Americans face much more risk than most of their European counterparts. The US model is also poorly-placed to deal with the longer-term impact of Covid-19. The virus does not just kill people; it may also lead to long-term health problems for survivors, who will need public support to improve their health and keep them in work. Nor is the US labour market as dynamic as its proponents suggest, and it is less effective at creating jobs than those in many northern European countries.

In the long run, there is too much uncertainty about Covid-19 to make firm predictions about its long-term effects. Hopes for a vaccine are rising, as developers in the US, China and Europe have found ways to stimulate human antibodies (although they have not yet demonstrated that their vaccines curtail infection). But successful vaccines will take time to be manufactured and deployed, and unemployment is likely to stay high in both the US and Europe in the interim, as hospitality, transport and leisure companies struggle to cope with continued social distancing measures.

The risks of the pandemic to the US are both immediate and long-term. Unless there is a rapid return to lockdown in many states, infections will continue to rise, around 1% of cases will die, and another 4-5% will be left with potentially long-term health problems. Withdrawal of emergency income support to businesses and households would lead to steep rises in bankruptcies, unemployment and poverty. And the healthcare system was already failing many citizens going into the pandemic: in its aftermath, if those who suffer long-term health problems do not receive support, many will leave the labour market. If the aftermath of the Great Recession is any guide, the US labour market will not be more effective at redeploying workers to contact-light sectors of the economy than Northern European countries, and it lacks the active labour market policies needed to retrain people and match them to employers. A resounding victory for Joe Biden in November may give him the mandate to expand healthcare and support for the unemployed, but the Republican Party will do all it can to stop him from sharing more risk between US citizens.

On the other hand, Europe fails to provide enough risk-sharing between member states. The recovery fund is a welcome step, and if the pandemic ends quickly, it may be enough to stop Southern Europe’s debts from curtailing a recovery in consumption and labour demand. But as social distancing continues, private and public sector debt and unemployment will continue to rise. Eurozone macroeconomic risk-sharing is not automatic enough, other than through the European Central Bank, whose role in keeping borrowing costs low is contested. If the pandemic endures, US and European politics will continue to be dominated by their respective federal weaknesses. Before Covid-19, greater risk-sharing at the federal level was difficult on both sides of the Atlantic, despite the strong case for it. Whichever side proves more able to do so – with the consent of electorates – will be the more stable polity in the decades to come.

‘Is the US or Europe More Resilient to Covid-19?’ – Policy Brief by John Springford and Simon Tilford – Centre for European Reform / CER.

The Policy Brief can be downloaded here

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