How government spending has impacted world economies

While the U.S economy has been strong through 2024 following the pandemic, the European economy has lagged. Germany and the U.K., the two largest European economies, narrowly avoided a recession. This is partly due to lower government spending, resulting in lower consumer and private spending.

After the pandemic started, the U.S. spent $5 trillion in relief, while the U.K. and Germany led European spending with $500 billion. In comparison, the U.S. spent more than double what most European countries spent in terms of the relative size of their respective countries. The pandemic relief in America left U.S. consumers in a better position than European consumers. During the period of high inflation and unemployment around the world during Covid, American consumers could save and spend more than $2.5 trillion, allowing the economy to continue to grow. According to Moody’s Analytics Chief Analyst Mark Zandi, the excess savings “allowed businesses to keep hiring, [raise] wages, and [make] the kinds of investments needed to keep the economy expanding.”

However, it wasn’t just that the U.S. government spent more than European governments; it was also how they spent it. In Europe, several governments paid companies to keep their employees employed so that there would be a seamless transition back to work after the pandemic. While the U.S. spent $800 billion on paying employees to stay home after the pandemic ended, this allowed employees to be more selective and either find better positions or start their own companies. Adam Posen, president of the Peterson Institute for International Economics, believes this is why American workers saw an increase in productivity in 2023 that Europe didn’t experience.

Not only are consumers in America spending more, but private companies are, too. In part due to subsidies, including the Inflation Reduction Act and CHIPs Acts. This resulted in American companies investing $650 billion in private investments, such as manufacturing facilities for semiconductors and electric vehicles. This is important because those industries have a more challenging time surviving during periods of high interest, potentially pulling down the economy.

But Zandi believes these bills allowed them to stay afloat. Germany, the leading European economy, has seen limited growth for the past year and a half. Luckily, they were able to avoid a recession by growing .2% in the first quarter of 2024. But in the second quarter, they shrank by .1% again, While the Eurozone also shrank by .1% to end 2023, the U.S. economy grew by .7% in the second quarter of 2024. 

While the difference in economic performance is partly due to government policy and spending, some things are out of their control. For example, the Russian invasion has pushed energy prices higher in Europe than in the U.S. Europe, especially Germany, which is much more dependent on Russia for its energy needs. However, it is not all bad news for Europe, as some countries that have typically lagged behind are starting to outperform the rest of the continent. Southern Europe’s economies have historically struggled, as they have overcome the eurozone debt crisis a decade ago. Greece, Portugal, and Spain have reworked their finances and revived their growth. As those countries have reduced their debt, their sovereign debt has become attractive again. Greece’s economy grew twice as much as the Eurozone’s last year, Portugal grew by 1.4%, and Spain rose by 2.4%, showing that there is still optimism for the European economies.