2020 marked a historic year for the European Union. Forced to respond to the unprecedented challenges of the COVID-19 health crisis, European governments and monetary policy-makers stepped up and delivered.
For the first time in the history of the union, Europe issued common debt. So impressive was the demand and the package that the Euro, the common currency, felt the effects immediately – it rose from 1.06 at the start of the pandemic to over 1.23. Even now, almost twelve months into the crisis, the Euro exchange rate against the dollar remains elevated, well above 1.20 in the last week.
Yet, dark clouds appear on the horizon. Despite the massive fiscal and monetary policies, the European effort and response to the pandemic fades in front of what the United States delivered. If these are measures to support economic recovery, then the chart below reveals a sharp discrepancy between the European response to the crisis and the American one. Hence, economic recovery on the other side of the Ocean should outpace the European one. Furthermore, the risk here is that the hesitation from the fiscal authorities in Europe may lead to another decade of weak economic growth.
It Is Not the First Time When Europe Takes a Step Back
The 2008-2009 Great Financial Crisis led to a recession in most advanced economies. When analyzing recessions, economies like to refer to the last known crisis for the simple reason that the conditions are the closest to the current ones.
After the crisis, the United States led the way out of it. The unconventional monetary policy measured, applied for the first time in the United States by the Fed, were quickly copied throughout the rest of the advanced world. They paid off – but not in Europe.
While the United States economy recovered fast and forced the Fed to start a hiking cycle that led the federal funds rate to over 2%, Europe faced another decade of insignificant economic growth. The reason was the 2012 sovereign crisis and the outcome of it – negative rates that were not lifted ever since.
Therefore, Europe lost a decade already, and it is at risk of losing another as the world nears the end of the pandemic. The chart above is a cause of concern for the European recovery robustness. And after all, for the Euro as well.