Corona aid – How the USA and EU want to cope with the economic crisis
Dealing with the economic consequences of the Corona crisis costs billions. In all of the world’s major economies. How these billions are used and what they are spent on varies greatly. In the EU, the Corona development fund is relying on digital and climate-friendly investment impulses that are intended to stimulate the economy through long-term growth projects. The US is going a different way – including direct payments to households. Both are smart, say economists. And: What is good for Europe does not have to bear fruit across the Atlantic.
As a reminder, under the new President Joe Biden, the USA passed a $ 1.9 trillion corona package last week, the largest economic stimulus package in its history. As part of this, every US household with an annual income of up to 80,000 US dollars will receive a one-off payment of 1,400 US dollars. The increased unemployment benefit, which would soon expire, will be extended until September 6th. More than US $ 200 billion is invested in education and care. In addition, part of the money is to be used for a vaccination campaign and the rapid vaccination of the population.
The EU is taking a different path with the recovery and resilience facility (RFF) it decided last month. 750 billion euros flow into digital and ecological development projects in the individual member states. There are 312.5 billion in grants, 360 billion euros in loans. The rest of the 750 billion will be provided through programs in the EU budget. For this, the EU states are taking on joint debts for the first time in their history. The distribution of funds is based on demand, Italy and Spain, which were particularly badly affected by the corona virus, receive 65 billion and 59 billion respectively, Germany accounts for around 22 billion, and Austria is to receive 3.3 billion from this pot.
The EU states have to submit projects to be funded by the end of April, and the EU Council then has to approve them. One point could delay the disbursement of the funds: All 27 EU countries still have to ratify the own funds grant, i.e. their budgetary contribution to the package. And this is a hotly debated issue in some EU countries such as Italy.
Quick recovery
The package is only half the size of the US one. “Last year the EU spent very large sums of money on fighting pandemics,” says Atanas Pekanov, an economist at the Economic Research Institute (Wifo). This year the EU is lagging behind in terms of fiscal measures. “The USA distributes a lot of money quickly, en masse, which should flow into consumption as widely as possible and thus lead to a rapid economic recovery. Some even speak of the market overheating,” says Pekanov.
Europe is relying on investment stimuli and a slower, but longer-term, sustainable recovery. The development fund is also a question of location, especially when it comes to investing in digital projects and renewable energies. What works in the USA doesn’t necessarily have to bear fruit in Europe and vice versa.
Most EU countries already had a more closely-knit social network than the USA before the Corona crisis. Anyone who becomes unemployed in the USA in many cases immediately loses their social security and often receives no and only for a short time unemployment benefits. This is different in this country and in many other EU countries. Unemployment benefits, social security and other security mechanisms have a longer effect after a job has been lost. That is why the loss of prosperity is not so abrupt.
Nevertheless, Pekanov believes that the USA will benefit more from its watering can model this year in terms of economic growth than the EU countries. In addition, vaccination coverage of the population in the USA is taking place much faster than in the EU countries. Which country vaccinates and how quickly will also become a question of location at the end of the day.
Long-term location question
Experts also warn that Biden’s economic package could not only flow into consumption, but also into stocks. It could also increase the savings rate. This is because with an annual income of $ 80,000, funding is relatively generous and broad-based. This means that not all households that will find a check in their mailbox in the coming weeks will acutely need this money.
But that also means that the already booming stock market would be given further impetus. Deutsche Bank in the US estimates that up to an additional $ 150 billion could flow into the stock market through household checks. US equity funds are now seeing inflows of up to $ 15 billion per week. Some economists are therefore warning of a bubble in view of the rapid growth.
Stefan Schleicher, economist at the University of Graz, has a simple explanation for this development. “In the USA, the need to save and invest is very great because there is hardly any public provision for old age.” Many Americans therefore invest their money in stocks. “There is a different culture in the US. There it is quite normal as a citizen to invest in stocks,” says Pekanov. In this country, property is more likely to be invested.
In addition to direct aid, green infrastructure projects are also to be financed in the USA. The Biden administration has set itself the goal of climate neutrality by 2050. Unlike in the EU package, however, these play a subordinate role. While the US is aiming for a quick recovery, the EU wants to provide long-term impetus.
While the USA wants to stimulate its economy with direct funding to households, the EU relies on investment funding. What is good for the USA is not absolutely necessary in Europe, and vice versa.