What has happened
The Euro began the day more strongly however any hope that the EU leaders summit would agree burden sharing quickly evaporated and with it the gains in the single currency. In many ways yesterday was textbook Europe, gradual movement towards an almost inevitable final goal however a lack of details which really signifies a lack of agreement. The news that Gilead’s anti-coronavirus drug trials faltered also helped turn sentiment in the US session with the result that US markets ended flat.
Negotiation points clear, but details absent
Going in to yesterday, leaked reports suggested there may be a burden sharing aspect to the EU Recovery Fund. Equally Chancellor Merkel commented before the meeting that the EU response needed to be huge. Both of these hints helped set up the summit as a key event to watch. In reality, joint bonds didn’t seem to be debated widely and appear off the table for the time being. The question appears to be whether the payments to stricken nations will be treated as grants, effectively handouts, or loans that need to be repaid. Currently the debate is the ratio between grants and loans and how the Fund is financed. Tellingly there is no plan yet as to when the Fund’s resources would be available to member states. When Commission President Von der Leyen was asked whether the funds would be available in 2020 the answer was that the Commission was willing to look into it. Whilst economists have differing views on the shape of the post-coronavirus recovery an economic boost in 2021 is likely to be far too late to help Southern bloc countries such as Italy.
What does Brooks Macdonald think
Ultimately there will be an EU recovery fund and there will be an element of burden sharing but yesterday was a fudge with enough progress to not derail expectations but insufficient movement to please investors. It is a fear of these political fudges that has led to our underweight position in European equities which we’ve had in place for several years now. The responses of Northern bloc countries wanting to protect their budgets from perceived fiscal recklessness in the South is entirely logical. As is the desire by the Southern bloc to request fiscal support given the single currency’s relative weakness has helped prop up the export markets of industrial behemoths such as Germany whilst putting additional pressure on struggling nations such as Italy. It is no one’s ‘fault’ that this impasse exists but we don’t expect that we will see a strong joint European fiscal response unless the economic damage increases further.