Economic Adjustment in the Euro Area and the United States during the COVID-19 Crisis

The COVID-19 crisis was a major economic shock to both the euro area and the United States. The US experienced a larger impact on human health but suffered a smaller economic contraction. Both regions experienced a faster pace of the recovery than during the global financial crisis. In spite of the larger decline in GDP, the labour market in the euro area remained resilient as job retention schemes and other measures have protected employment, while the US saw sharp changes in employment and unemployment and participation rates. There remains also significant uncertainty over the possible impact of COVID-19 on productivity growth. The latest developments should be seen in the context of longer-term trends. Divergence in per capita incomes between the euro area and the US grew after the global financial crisis, with a decline in euro area TFP growth being the most important factor. Despite the employment rate reaching historically high levels in the euro area before COVID-19, it remained lower than iin the US, weighing on the relative growth performance. Capital deepening has stagnated in both regions since the global financial crisis, although private investment in the US has proven more dynamic overall. In stark contrast with the period after the global financial crisis, many euro area governments have now delivered substantial public investment, supported by the Recovery and Resilience Facility. Finally, this paper highlights some tentative lessons for the euro area and it puts forward some issues for further research.