Facing the immediate and long-term risks of COVID-19 on both sides of the Atlantic

By favouring re-opening over suppressing the Coronavirus, the US population – and the economy – may emerge from the pandemic in poorer health than most European countries, write John Springford and Simon Tilford.
Press Association

By John Springford and Simon Tilford

John Springford, deputy director, and Simon Tilford, economist, of the Centre for European Reform

12 Aug 2020

US claims for unemployment benefit are rising again, after a second surge in the number of COVID-19 infections. In Europe, by contrast, economic activity is picking up, and the pandemic is largely under control (although there are some unnerving signs that infections are creeping up once more).

US President Donald Trump downplayed the severity of the virus, called upon state governors to end lockdowns prematurely (thereby “liberating” citizens, as he put it), and failed to expand testing and contact tracing sufficiently.

Many Europeans think that their comparative success is not only explained by better leadership, but also by the European model of larger and more interventionist government. Are they right? Yes and no.

On the face of it, big, well-funded states appear to have provided a better safety net for workers and people infected with the disease. Kurzarbeit (short-time working) in Europe, in which governments subsidise wages to keep workers attached to firms, have prevented the unemployment rate from rising for now.

In the US, it shot up in March and April. But the US headline unemployment rate is misleading; many workers who are counted as unemployed are in fact furloughed, and the temporary expansion of unemployment benefit – which furloughed workers receive – has provided generous income support.

“Many Europeans think that their comparative success is not only explained by better leadership, but also by the European model of larger and more interventionist government”

Emergency expansion of healthcare access provided uninsured Americans with access to testing and treatment and brought the US closer to the European norm of universal coverage.

There are no charges for COVID-19 testing and the federal government is paying for treatment for the uninsured (although insured Americans must cope with high co-payments as normal).

Yet the risks of the pandemic to the US are both immediate and long-term. Many states have started to lock down again as infections continue to rise. Around 1 percent of cases will die, and another 4-5 percent will be left with potentially long-term health problems.

Renewed lockdowns will reverse the recovery in employment, and premature withdrawal of emergency income support to businesses and households would lead to steep rises in bankruptcies, unemployment and poverty.

This is more likely in the US than Europe, where there is greater consensus on the need for government to impose further lockdowns and keep as many affected firms and households solvent as possible.

The US healthcare system was not working well on the eve of the pandemic: life expectancy had stalled, even as costs had ballooned. If COVID-19 survivors who suffer long-term health problems do not receive more financial support, many will face spiralling healthcare costs and falling living standards.

The US labour market creates fewer jobs than its northern European peers: after the Great Recession the US employment rate was slower to recover than in the UK and Germany. And the US lacks the support European governments provide to retrain unemployed workers and help them find jobs that are available.

A resounding victory for Joe Biden in November’s presidential election may give him the mandate to improve the healthcare of poor and unhealthy Americans and to bolster support for the unemployed, bringing the US closer to European norms. But the Republican Party will do all it can to thwart attempts to share more risk between US citizens.

Europeans, however, should not be complacent about the challenges they face. The European response to the crisis has certainly demonstrated the advantages of well-funded states, and a high level of risk-sharing within countries.

But in the decade since the euro crisis Europe has suffered from chronically weak demand, the result of a failure to share enough risk between Member States: high public debt in Italy means that its government is less able than Germany’s to support firms and workers during the pandemic.

The EU’s recovery fund is a welcome step towards greater risk-sharing between EU economies, but it is small and time-limited, with transfers between Member States amounting to 2.8 per cent of annual GDP.

“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”

If the pandemic ends quickly, it may help to prevent Southern Europe’s debts from curtailing a recovery in the demand for labour. But as social distancing continues, private and public sector debt and unemployment will continue to rise.

The eurozone’s macroeconomic risk-sharing is not automatic enough, other than through the European Central Bank (ECB), whose role in keeping government debt service low is contested in Germany.

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.

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