08 July 2020, Belgium, Brüssel: German Chancellor Angela Merkel (CDU), President of the European … [+]
dpa/picture alliance via Getty Images
After a marathon, nearly five day negotiation, European leaders have finally agreed a post coronavirus recovery package for the European Union, and have signed off its budget.
While the plan has been watered down in some measure, it is still a significant support, and very importantly from the point of view of markets (for example the spread between Italian and German government debt is the lowest it has been in months) the deal points the way towards greater fiscal coordination. In the long run this should be positive for the euro – which for so often has not enjoyed credibility in the eyes of investors in New York, London and Asia.
Deal cut back
In detail, the plan will provide for the disbursement of EUR 750 bn over three years, though a mixture of loans and grants. Of the total amount EUR 390 bn will now be disbursed as grants, compared to a previously inrended figure of EUR 500 bn.
The amount of the recovery stimulus that was to have been provided in grants was one of the key factors that led to more fiscally conservative nations like Denmark, Sweden, Austria and the Netherlands to negotiate for a more fiscally conservative deal.
From an investor’s point of view, there are a number of trends to emerge or be strengthened by the plan, that on balance support the investment case for Europe (especially with US markets trading at expensive levels).
The first is that France and Germany are again driving the political debate in Europe and this policy momentum is a good thing. The more predictable element is the division between smaller Northern states and large Southern ones, on the basis of fiscal outlook. As an example, relations between the Netherlands and Italy have not been good to understate matters.
Secondly, the winners of the stimulus programme continue to be the Eastern states, such as Poland and the Czech Republic. This underscores an emerging faultline. In the past two years
much political energy has been taken up with the erosion of liberal and democratic values in countries like Hungary. Should this continue, we can expect that future stimulus and aid packages from Brussels to be more explicitly tied to the ability and willingness of states to adhere to ‘European values’ and specifically to support press freedom and an independent judiciary.
The third factor and an ongoing reality is that not unlike the USA, Europe’s central bank the ECB remains the glue holding the euro-zone together. Despite calls from the current ECB President Christine Lagarde and her predecessor Mario Draghi, many of the reforms necessary to build out the euro zone, such as debt reduction, capital markets union and banking consolidation, have been neglected. At some stage, this will come to haunt the euro-zone, but for the moment, the central bank will, like the Fed, keep buying bonds under the cover of the coronavirus crisis.
That the EU can now borrow in its own name, and to a limited degree can tax certain transactions, is a notable step forward for the euro, and whilst not quite fiscal union, will lead to more fiscal power for the EU.
So, having toiled in true ‘euro’ fashion for five days to produce a deal (recall the long summits during the Greek crisis) Europe now has a stimulus plan which will bolster its recovery, but more importantly support the euro.