The US has been the world’s largest economy for over one hundred years. It has displayed greater resilience to external shocks, such as the Global Financial Crisis and COVID-19, than other global hubs such as the euro area. What are the reasons behind the US’s superior economic performance? Will this resilience continue in the face of future shocks?
There are multiple reasons underlying the US’s outperformance of the euro area during the 2008 Global Financial Crisis. First, the US response was more forceful. Policymakers introduced the Troubled Asset Relief Program to purchase mortgage-backed securities and bank stocks, in addition to strong fiscal support and QE. In contrast, policymakers in the euro area were slow to act to the region’s subsequent sovereign debt crisis due to ongoing discussions around ‘moral hazard’. The US’s different policy stance comparative to the euro area yielded very different results in terms of economic growth. GDP in the US was 8% higher in 2014 compared to 2007 Q1. In contrast, the euro area suffered a double-dip recession, with economic output in 2014 essentially unchanged from 2007 Q1.
The US also outperformed the euro area during COVID-19, in part due to a stronger fiscal response. By 2023 Q3, US GDP was 7.4% above its end-2019 level, compared to 3.0% for the euro area — Fathom expects that gap to widen further in the coming year.
However, the euro area temporarily outperformed the US in one measure — unemployment. There was a sharp increase in US unemployment at the start of the pandemic, as shown in the chart below. The euro area kept unemployment low by supporting workers who remained in their pre-COVID jobs. US workers were supported too, but with enhanced unemployment insurance. Thus, workers got support even if changing jobs. The measures taken by the euro area aided in averting a sharp rise in unemployment, however the US unemployment rate quickly fell below its euro area equivalent once the US economy reopened.
Will the US be as resilient towards future economic shocks as it has been in the past? In the transition to net zero, oil producing states look especially vulnerable, with five out of the six states registering the lowest GDP growth since 2019, Louisiana, Alaska, Wyoming, Oklahoma and North Dakota, featured. The US as a whole is also at risk of being on the losing side of the net zero transition as — according to Fathom’s Energy Transition Scores — the US is ranked ninth in the world in terms of economic vulnerability from the transition. However, when including ability to respond, this risk is significantly reduced, with the US ranking 28 in terms of economic vulnerability from the transition, due to its strong and diverse economy. Hence, the US’s strong economic performance places it in a good position to handle the transition to net zero, but there will be an unequal impact on different states. The US Treasury is well-positioned to reduce those inequalities through centralised fiscal policies, an option that the euro area does not hold.
In the EU, the share of electricity that is generated by coal is on a downward trend, while the share generated from solar and wind power is on an upward trend, as can be seen in the chart below. At the same time, employment continues to fall in the EU-defined ‘brown’ occupations, i.e. jobs in economic activities with high pollution intensity, from 8.2% of total EU employment in 2008 to 5.7% in 2021, as the shift away from high-polluting activities (e.g., mining, manufacturing, agriculture) continues. Bulgaria, Croatia, Poland, Greece and Romania are most vulnerable, with employment in broader ‘brown’ activities accounting for 11% to 16% of total employment. Holding less fiscal power than other euro area economies, and without the possibility to redistribute money between nations through a centralized fiscal policy, these EU nations may suffer more markedly from the transition towards net zero.
To conclude, during the Global Financial Crisis and the COVID-19 pandemic, the US quickly introduced policies to support the population, including the use of strong fiscal support among others. Redistribution through a centralised fiscal authority may help states that are on the losing side in the transition to net zero. In the EU, although ‘brown’ jobs represent a relatively low share of total jobs, the transition will impact some countries more than others, and with the EU not having the same policymaking opportunities as the US, this might lead to increasing inequalities.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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