The coronavirus response: Why so much talk about the U.S.?
We believe massive U.S. policy response is needed to ensure that the global downturn we’re experiencing does not turn into a permanent impairment to the global economy. Some of that perspective is due to the U.S. economy being the largest in the world, and that as a country, the U.S. consistently runs a trade deficit. Put another way, America is a very large customer in the global economy, which means that permanent demand destruction in the U.S. has large impacts across the world.
Most of our focus on the U.S., however, is due to the fact that policy makers have more work to do to in America to limit the damage of this crisis than in other developed countries. Comparing the U.S. to Europe helps illustrate why.
Monetary policy: U.S. vs. Europe
Let’s start with monetary policy. The U.S. dollar is the principal reserve currency for the world. When crises such as the one we’re currently facing arise, there is tremendous demand for U.S. dollars everywhere in the world.
In order to make sure global financial conditions do not tighten to the point where even more serious economic damage is done than has already occurred, the U.S. Federal Reserve (the Fed) has to ensure there are enough dollars to meet this almost insatiable demand. Thus, the massive response from the Fed. Of course, the European Central Bank (ECB) and other central bankers have also responded to the liquidity needs of their constituencies, but the U.S. dollar occupies a unique place in the global financial system—and the Fed has recognized the responsibility that entails.
Fiscal policy: U.S. vs. Europe
When comparing the fiscal relief packages seen in Europe to those in the U.S., some notable differences exist, particularly as it relates to the relative social safety nets of the U.S. and Europe. One of the keys to the success of the responses of policy makers is to try to limit the economic damage of the crisis, so as not to inflict significant permanent damage to the pipes and plumbing of commerce, or to the ability of the consumer to resume spending upon recovery from the virus.
In order to ensure consumers are not permanently impaired in their ability to consume, policy makers need to provide support. Bluntly, the social safety nets in Europe are more extensive than those in the U.S. Universal healthcare, more generous unemployment and sick leave benefits are among the most notable differences. In the U.S., just to match the existing safety nets in Europe, policy makers are having to make unique efforts to approve and fund that relief. An examination of the package approved by the Senate last week demonstrates how much of the focus is in those areas.
Canada is in a similar position to Europe in terms of the larger safety net compared to the U.S. The C$102 billion stimulus package announced by the federal government is targeted to provide aid directly to households and small businesses whose income will be disrupted, as well as tax deferrals for those most impacted.
The net result is that the fiscal response necessary to avoid massive permanent consumer spending impairment is larger in the U.S. That is not to say Europe is off the hook in terms of fiscal relief, but rather to say the need is not as great.
To give some context to this, courtesy of our friends at UBS, here are the sizes of the packages being considered or approved in the U.S. and Europe (and Canada), in terms of percentage of annual GDP (as of March 25):
- U.S. package passed by Senate: 10% of GDP
- EU: 0.3% of GDP
- France: 1.9% of GDP
- Germany: 4% of GDP
- Italy: 1.4% of GDP
- Spain: 2.8% of GDP
- UK: 3.2% of GDP (the UK is closer to the U.S. on some of these issues, and they may need to do more than the EU countries).
- As for Canada, the proposed package represents 5% of GDP
There are a lot of other countries that are initiating relief packages, but the above should give credence to the relative size of the U.S. packages. Ultimately, the U.S. is doing more in this crisis because more is needed.