President Joe Biden’s $1.9 trillion stimulus bill, if congressional leaders pass the full amount, would take his administration’s spending in 2021 to more than three times as much as euro-area countries have planned, according to UniCredit SpA.
As a consequence, most economists expect the U.S. economy to reach its pre-pandemic size around the middle of 2021, roughly a full year before the currency bloc.
JPMorgan Chase & Co. estimates the “fiscal thrust” — the boost from discretionary government spending minus the drag of expiring tax breaks and support measures — will add 1.8% to U.S. output this year. For the euro zone, it’ll subtract 0.1%.
Erik Nielsen, UniCredit’s chief economist, says the difference in spending plans compared to the U.S. is “mind-boggling” and the euro-zone approach is “severely inadequate.” It’ll lead to a muted recovery, higher unemployment, deeper economic scars and weak inflation, he said in his report.
Such an outcome would be all too familiar for the euro zone. Fixation on austerity to reduce debts after the 2008-2009 global financial crisis, rather than boosting growth through consumption, condemned the bloc to a sluggish recovery which turned into a sovereign debt crisis and double-dip recession.
Nielsen cites the so-called output gap as a key indicator of the problem. That gauge of unused economic potential is hard to measure precisely, but it’s widely considered to be bigger in the EU than in the U.S. at the moment. That means Europe should be doing more, not less, to boost its economy.