A decade on from the global financial crisis and the German-led austerity response, which was so punitive to the South of Europe, the leaders of the EU countries have decisively changed tack. The tax rises and budget cuts that led to an anaemic economic recovery, and debt crisis, are out, while Keynesian fiscal stimulus is firmly in vogue.
Since the Q1 coronavirus sell-off, EU nations have announced a remarkable EUR 2.64tn in stimulus: EUR 1.35tn of bond buying in the Pandemic Emergency Purchase Programme, EUR 540bn of short-term stimulus in April, and, finally, the EUR 750bn Recovery Fund, agreed on Monday.
The Recovery Fund, could prove to be a game changer. For the first time the EU is to issue its own debt, repayable by 2058, distributing EUR 390bn as grants to countries most in need and a further EUR 360bn as loans. While the amounts were watered down from those first announced in the surprise Merkel-Macron press conference in May, opposition from the so-called ‘frugal four’ countries was fairly muted, although they won some modest EU budget concessions during an intense negotiation period.
The issuance of grants, effectively a transfer of wealth from the more solvent nations to their indebted neighbours, is – in political terms – a crossing of the Rubicon moment. Just as quantitative easing (QE) was supposed to be temporary, we can reasonably expect similar coordinated transfers if future stimulus is required to emerge from the coronavirus pandemic.
What sort of programme might this take? A notable element of the Recovery Fund is that 30% must address climate concerns. Across the Atlantic, Joe Biden, the US Presidential candidate, has plans for $2tn in green energy and infrastructure spending, while Christine Lagarde, president of the European Central Bank, said this weekend in an interview with the Financial Times, that she would ‘explore every avenue available in order to combat climate change’. With this in mind, a future package in this guise could be launched if the economic recovery begins to stall.
Brexit negotiations limp on
Almost forgotten in this climate of rising equity markets and tightening periphery bond spreads is the Brexit negotiations with the UK. Talks appear deadlocked once more, with the next round due to start on August 17, and trade talks perhaps being delayed until September. This leaves very little time to reach an agreement before the end of the year, something which is reflected in UK asset prices. The FTSE 100 has been the weakest of all major indices year to date, and sterling is depressed, but interestingly gilts trade at negative yields up to a seven year maturity with much of issuance soaked up by the Bank of England. Talk of the UK being treated as an emerging market nation, by financial markets, appears to be too gloomy, but there is the outside chance it might rally like one if some kind of a consensus is reached with Michel Barnier and his negotiation team later in the autumn.