Two once-in-a-lifetime crises have hit the global economy in the past two decades. The first was the global financial crisis (GFC), which began in financial markets in the United States in summer 2007 and intensified after the collapse of Lehman Brothers in September 2008. The second was the economic meltdown that resulted from the COVID-19 pandemic, which sunk the global economy in 2020. The two crises played out similarly in the US, but differently in Europe.
Economic contraction was sharp after the demise of Lehman Brothers in 2008. It was even sharper in 2020 when widespread lockdown measures resulted in quarterly output drops of 10% in the US and 14% in the EU in the second quarter of the year (Figure 1). In the US, employment fell more than output in both recessions. In the EU, employment fell less than output, especially during the pandemic.
The US economy recovered faster than the EU from both crises. After the global financial crisis, US GDP returned to its pre-GFC level in 2010Q4 – even though the US financial system was the epicentre of that crisis. In the EU, recovery took three more years, mainly because of a second-dip recession caused by combined sovereign debt, banking and balance-of-payments crises in several EU countries in 2010-2012. After the pandemic, US GDP exceeded its pre-pandemic level in 2021Q1, while it took two more quarters in the EU. Moreover, US output has almost returned to the pre-crisis trendline, while this is not the case (at the time of writing) for the EU.
The recovery of employment to its pre-crisis level took much longer than the recovery of output in the US after both crises: after the GFC, US GDP recovered after 2.5 years but employment only after 6.5 years. After the pandemic, output recovered after five quarters, while employment only after three years. These figures show that economic recessions can result in lasting social hardship. In the EU, employment recovery after the GFC took two more years than the lengthy output recovery. But after the pandemic, the two indicators reached their pre-crisis levels almost at the same time (the gap was just one quarter).
Figure 1 also suggests that labour productivity increased much faster in the US than in the EU. While the overall change in employment between 2005 and 2022 was almost identical in these two large economies, US GDP increased by about 10% more than EU GDP over the same period.
Thus, the recovery from the pandemic recession shows similarities with the recovery from the global financial crisis-induced recession in the United States, but it’s rather different in the EU. The US recovered faster from both recessions and recorded faster labour productivity increases than the EU. EU labour-market recovery was painfully long after the GFC, but after the pandemic, labour-market outcomes were more benign in the EU than in the US.
The EU is also characterised by significant differences across the bloc (see Figure 3 in the Annex). Output growth between 2005 and 2022 in central and eastern EU countries, Ireland, Luxembourg and Sweden rose faster than in the US, while Greek output is still 15% below its 2005 value, and Italian output has barely exceeded its 2005 level. The pandemic recession was deeper in southern EU countries than elsewhere in the EU.
The EU’s success in creating jobs and reducing inactivity
To shed light on the components of labour-market adjustment, Figure 2 reports the share of people employed, unemployed (ie looking for work) and inactive (ie not looking for work). We focus on the 25-64 age cohort so that students under the age of 25 do not blur the picture.
The US had a higher employment rate than the EU up to the pandemic, when US employment fell drastically, while the fall was moderate in the EU (Figure 2, Panel A). As a consequence, there was a major spike in US unemployment, but less so in the EU (Figure 2, Panel B). Since the pandemic, the EU has overtaken the US in terms of employment rate. The EU’s employment rate reached a historical record level by 2022, while the US employment rate has just recovered close to its previous highs.
Another major success of European labour markets has been the growing integration of inactive people (Figure 2, Panel C). In 2005, the share of inactive people in the EU was 25%, well above the US value of 21%. From 2005 up to the GFC, EU inactivity declined steadily, while the US inactivity rate stayed flat. The GFC resulted in a short-lived and small increase in EU inactivity, which was followed by a marked decline. In contrast, an increasingly large share of US workers left the labour market up to 2014, followed by a partial reversal. The pandemic caused a sudden increase in inactivity in both economies. Yet, the subsequent return to labour markets was much more pronounced in the EU than in the US.
Again, there are big differences within the EU (see Figure 4 in the Annex). The employment rates in Italy, Romania and Spain were well below the US values during the whole time period, while in Belgium and France, the rates were somewhat below the US rate over most of the period. In contrast, the Swedish and Danish employment rates were higher than the US rate for the full period, while the same applies to the post-GFC period for Austria, Estonia, Finland, Germany and the Netherlands. Most central and eastern EU countries also overtook the US in terms of the employment rate.
What explains transatlantic differences?
The decade-long reduction in European inactivity could be explained by the various social initiatives the EU institutions and EU countries have adopted. A general explanation for the muted employment declines after crises in Europe, compared to the US, could be differences in employment protection measures, which are much more favourable to workers in Europe than in the US.
While the pattern of the US recovery from both the global financial crisis and the pandemic crisis was similar, it was rather different in the EU. The much faster EU recovery from the pandemic recession than from the global financial crisis was related to macro and micro policies, as well as differences in vulnerabilities and the institutional framework. When the global financial crisis hit the world, most southern EU countries, some eastern EU countries, and also Ireland, suffered from vulnerability in their financial sectors, external financing positions and/or public finances. This was no longer the case by the time of the pandemic. After the global financial crisis, the initial fiscal response was moderate, and was quickly followed by fiscal tightening. In contrast, fiscal stimulus was provided throughout the EU after the pandemic. The EU’s institutional architecture improved considerably between the two crises, most notably through tighter banking regulation, common banking supervision in the euro area, the setup of crisis management institutions and a greater focus on macroeconomic surveillance.
A specific reason for the less-pronounced European employment decline than in the US during the pandemic is the different labour-market policies. Inspired by the German Kurzarbeit, which was successfully used after the global financial crisis (IMF, 2020), European countries adopted various short-time work schemes aimed at keeping people employed: approximately 20% of the EU workforce benefited from such a scheme during the first wave of the pandemic (Eurofound, 2021). In contrast, in the US, the focus was on increasing the generosity of unemployment benefit systems (which in normal times are much less generous than in Europe) and lump-sum payments for all individuals below a certain income threshold. Cohen-Setton and Pisani-Ferry (2020) concluded that the US job-support programmes were much less effective than the French package.
Finally, the US adopted a larger fiscal stimulus than the EU during and after the pandemic, which supported a faster US economic recovery, while monetary policy was rather expansionary on both sides of the Atlantic.
It’s hard to judge whether the EU or US policy response was overall more successful: the US did better in growth and productivity, while after the pandemic, the EU did better in terms of employment. Ultimately, crisis policy choices seem to be consistent with underlying economic priorities: higher efficiency at the cost of less equity in the US, and greater social focus in Europe.
Eurofound (2021) COVID-19: Implications for employment and working life, Publications Office of the European Union, Luxembourg, available at https://www.eurofound.europa.eu/publications/report/2021/covid-19-implications-for-employment-and-working-life
IMF (2020) ‘Kurzarbeit: Germany’s Short-Time Work Benefit’, IMF Country Focus, International Monetary Fund, available at https://www.imf.org/en/News/Articles/2020/06/11/na061120-kurzarbeit-germanys-short-time-work-benefit
Cohen-Setton, J. and J. Pisani-Ferry (2020) ‘When more delivers less: Comparing the US and French COVID-19 crisis responses’, Policy Briefs 20-9, Peterson Institute for International Economics, available at https://www.piie.com/publications/policy-briefs/when-more-delivers-less-comparing-us-and-french-covid-19-crisis