Euroland at a Glance and As a Foil Against Which to Assess the State of America

August 13, 2020

The Covid-19 pandemic presents enormous and similar challenges to most nations. 2020 is an especially critical year for the United States because it coincides with a presidential election that presents very different visions on the country’s future. We look at Europe, because the Democratic Party agenda would move the United States closer to the European model, so a look at Euroland’s recent performance yields insight into how America might look if there is a regime change.

Real GDP in the euro area contracted 40.3% on quarter at an annualized rate during 2Q, and that followed an 8.6% drop in the first quarter and left GDP 15% below its second quarter 2019 level. With lessening lockdown restrictions, industrial production and retail sales increased 9.1% and 5.7% during June, but those recoveries still left second-quarter average levels down 16% and 5.3% from the first quarter. Compared to June 2019, industrial production fell 12.3%, while retail sales rose 1.3%.

CPI inflation was already far below target in July 2019 at 1.0% and had decelerated even further to 0.4% by last month. Euroland’s index of leading economic indicators, which is compiled and reported monthly by the Conference Board, fell 11.0% between December and July.

The pre-pandemic lows in Euroland unemployment of 7.2% in both March and April were above the U.S. counterpart, but the subsequent rise to 7.8% as of June has been much milder than experienced in the United States.

The pandemic depressed Euroland’s current account surplus, which at EUR 7.95 billion in May represented a 91-month seasonally adjusted low. As a percent of GDP, the surplus over the last twelve reported months was still ample at 2.2% but down a half percentage point from its size in the previous year through May 2019. Fiscal relief for the pandemic disaster is likely to balloon Euroland’s collective fiscal deficit to a bit over 9.0% of GDP this year.

The European Commission’s monthly economic sentiment index for the euro area imploded from 103.4 in February to 64.8 in May but revived subsequently to 82.3 by July.  Likewise, consumer confidence dropped from -6.6 in February to a low of -22.0 but then recovered partway to -15 last month. The Sentix measure of investor sentiment toward the euro area fell from +5.2 in February to -42.9 in April but more recently improved to an August reading of minus 13.4.

Governments in the euro area have had better success than the Trump administration in containing Covid-19. In the United States, there have been 16,199 coronavirus cases per million population, which compares poorly to Euroland’s four largest economies where the figures are 8,060 in Spain, 4,164 in Italy, 3,166 in France, and 2,642 per million in Germany. More than seven times more Americans have died from the disease than in those four Euroland members combined. Euroland has been far more successful bringing down the rate of new cases, putting those countries in better position than the United States to safely reopen business activities that involve people getting together. Europeans can be more confident than Americans to re-engage in such activities.

U.S. GDP did not sink as much as Euroland GDP in the first half of 2020, but it would not be surprising to see Euroland grow faster in the second half. Moreover, the sharper increase in unemployment that the United States experienced means greater risk of long-term structural labor market damage. Along the wider income and wealth inequality found in the United States than in Euroland, labor market damage could impede the strength of U.S. relative growth in the years ahead.

President Trump’s bid for reelection is labeling the Democratic Party policy agenda socialist, which is an incorrect understanding of the meaning of that word. When former French President came to power in the spring of 1981, he wasted no time adopting a real socialist agenda, the hallmark of which was nationalization of strategic businesses. That experiment failed quickly as attested by currency depreciation, accelerating inflation, and weak growth. Mitterrand adjusted, switching back to the European model of social democracy, with central reliance on market forces governing a vibrant private sector but also social welfare safeguards in areas such as healthcare, poverty, and environmental safety. Mitterrand’s willingness to adapt when policy consequences evolved differently from what he assumed enabled him to serve ultimately as president for 14 years.

The silver lining of the coronavirus pandemic is that political leaders around the world have been given the same problem to solve. Some countries are passing the test, but America is not one of them. The great remaining uncertainty is how quickly vaccines will be developed that are effective, safe, widely distributed and affordable sufficiently to restore confidence and social activities to a state that at least resembles pre-pandemic conditions. Financial markets are betting that point will be crossed soon. Hopefully, that assumption proves correct, but an important lesson from the past six months is that the vision offered by Trump’s Republican Party, while big on emotionally-heavy words like capitalism, freedom and socialism, has a glaring weakness when it comes to crisis-management.

The most desperately needed qualities in America’s leader will be adaptability and clutch hitting in times of crisis. Part of crisis management involves anticipation and being prepared when calamity strikes. Euroland was better prepared than the United States when the pandemic hit, and political leaders there, while not having many of the answers, had the smarts not to assume the problem would go away and knew better how to mobilize the right people to address the danger.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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