The US versus the EU – which economic region will recover more quickly?
Munsbach, 10th July 2020 – Against the backdrop of the state-imposed lockdowns due to the widespread Covid-19 pandemic, all global economic areas are experiencing a massive economic downturn. While some individual states within the European Union have already been grappling with technical recessions in recent years, in the US, the first quarter of 2020 saw the longest economic expansion, lasting more than 10 years, come to an abrupt end. However, the magnitude of the current growth slowdown is roughly comparable in both regions. Yet, in our view, there is a very clear answer to the question of which economic region will recover faster: the US.
The reasons for this are complex. It is primarily the strengths of the United States, on the one hand, and the weaknesses of the European Union, on the other, that leads us to make this, perhaps obvious, assertion. In addition, however, the currency and the different sectoral weightings also play an important role.
Despite an often-conflicting two-party system, the US has a simpler and more direct decision-making process in both monetary and fiscal policy matters. This system is also geared towards highly centralised authorities. In relative terms, US companies benefit from a favourable tax system, less regulation, and a very liberal labour market. Despite the massive reduction in taxes on corporate profits that came into effect at the beginning of the current US President's term in office, there is currently more discussion about further tax cuts than about reversing this rather generous election gift. Even if the Democrats were to take over the Oval Office and both legislative chambers in this year's election, not much would change in this fundamentally very market-friendly policy.
In Europe, on the other hand, there is an economic and monetary union (but no real political one), which is characterised by different, partly asynchronous economic cycles and very different macroeconomic fundamentals. The resulting different - and in some cases divergent - interests of the member states essentially complicate any decision and, even during this crisis, make it virtually impossible to implement timely and adequate fiscal and monetary policy. In Europe, political consensus always means a loss of time and quality and usually ends in the familiar "muddle through". The current EU budget is nowhere near sufficient to meet the challenges posed by the COVID-19 crisis. Although the proposed eurozone fiscal package represents a first step towards a fiscal union and more solidarity among the members, it remains to be seen whether and how quickly it will become a reality. If the package is implemented, it will only further delay long-needed national structural reforms. It will also be a decisive test for the elected representatives of the net contributing countries. After all, in the next election, they will be held accountable for the measures taken. For example, this could be a topic during the German Federal elections in 2021. Of course, in addition to the pan-European measures, in this discussion we should not forget the stimulus packages that have been adopted by the individual states - and which are relatively large. However, these are neither coordinated on a pan-European level nor do they serve interests that go beyond the borders of the individual countries. Due to their different dimensions, they are more likely to lead to even greater divergence between the states.
What gives the US an additional advantage is the status of the US dollar as a global reserve currency. The international search for "safe haven" assets means that the United States can finance its deficit more easily without having to accept a high risk of devaluation. This will keep the financing costs low for both the public and private sectors. The "Old Continent", on the other hand, still has the problem that its currency is too strong for some countries and too weak for others. The single currency cannot fulfil its balancing function for all states.
Finally, the dominance of the United States in the technology sector is also decisive for the speed of economic recovery. In this respect, it should be noted that a large number of companies were far less vulnerable during the crisis than others and were even able to benefit from it. Cloud computing and payment services, for example, have received additional momentum in the era of social distancing.
To sum up, the United States has a structural advantage that will very likely enable it to overcome the current crisis more quickly than the European Economic Area. However, we would urge caution when drawing conclusions about future stock developments from this. In the long term - and this means a time horizon well in excess of one year - these fundamental growth advantages will definitely be reflected in better performing stock indices. In the short term, however, we must take into account how much of this future growth has already been anticipated and how it is priced in. In other words, a blanket estimate based solely on the aforementioned factors, without taking into account the current valuation, would be too one-sided.
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