March 31, 2021 - 11:49am

Paschal Donohoe, the Irish finance minister and president of the Eurogroup, has written a preposterous article in the Financial Times claiming that the budgetary response of the EU and US to the pandemic has been more or less similar.

Donohoe states that “in 2020 alone, Europe implemented budgetary supports equal to 7 per cent of gross domestic product […], while the US stimulus figures [was] 10 per cent”. He thus concludes that “there is a difference, but it is not as significant as suggested by some”.

One could object to using overall budget changes (whether primary or not) to assess the fiscal stimulus in an economy, since to a certain degree the deficit increases automatically in a recession due to a fall in tax revenues. That’s why economists look at discretionary fiscal measures (spending increases and tax reductions) to assess the size and quality of an economy’s fiscal policy response.

Even using budget changes as an indicator, however, it’s not clear where Donohoe is getting his numbers from. Indeed, latest Eurostat data currently puts the EU’s current deficit (always a few notches above the euro area) at 5.8% of GDP. Considering that the EU’s deficit in 2019 was 0.6%, that’s an overall increase of around 5% in GDP — not 7%.

So where is Donohoe getting his 7% figure from? The link in the article leads to an ECB report which relays the same data, claiming a primary deficit increase for the euro area and for the US of 6.7 and 9.8% of GDP respectively.

Interestingly, the source for the euro area data is revealed to be the March 2021 ECB staff macroeconomic projections for the euro area, while the source for the US data is an October 2020 IMF report. Using data that is five months old for the US and new projections for the euro area is dodgy in itself, but we’ll overlook this detail. The point is that the ECB’s data — which puts the EU’s 2020 deficit at 7.2% (a year-on-year increase of around 6.5%) — conflicts with the Eurostat data, which puts the EU’s current deficit at less than 6% of GDP.

Even assuming that the ECB’s projections turn out to be right, the overall budget changes only tell us so much about what policymaker actively did to support the economy. For that we need to look at the discretionary fiscal measures. Now, according to the ECB’s own reports – which, funnily enough, take into account the grants from the EU’s Next Generation EU “recovery fund”, even though governments have yet to receive a single cent – the euro area’s discretionary fiscal stimulus in 2020 was 4.2% of GDP, while the US’ is put at 7.8%.

Even if these number were accurate, we’d still be looking at a discretionary fiscal stimulus in the US that is double the EU’s. Not exactly the small difference claimed by Donohoe.

However, even those numbers are dubious. Indeed, the IMF’s Fiscal Monitor Database of Country Fiscal Measures in Response to the Covid-19 Pandemic, which calculates the discretionary measures enacted by governments, offers a very different picture.

The IMF puts the EU’s discretionary fiscal stimulus at a paltry 3.8% of GDP, compared to a massive discretionary fiscal stimulus of 16.7% of GDP in the US — four times larger than the EU’s. Now, the discrepancy may have to do with the fact that the ECB (suspiciously) chose to use data dating back to October for the US, which wouldn’t account for the latest US budgetary measures. But this is the most updated comparative data we have, from a reliable source.

To conclude, the fiscal response of the EU and US is not even remotely comparable. The truth is that throughout the pandemic the UE/euro area has proven once again to be utterly dysfunctional, in macroeconomic as well as in organisational terms — just look at the vaccine roll out.

Thomas Fazi is an UnHerd columnist and translator. His latest book is The Covid Consensus, co-authored with Toby Green.