A Pandemic Recovery Plan intended to help European countries worst hit by COVID-19 is in progress. However, any failure that throws a spanner in the works could put Southern Europe bond spreads under renewed pressure and result in the euro losing ground. Investors in financials and especially banks will be disappointed should the EU fail to implement a coherent recovery plan.
On 19 June, the European Council’s first meeting to discuss the European Commission’s Pandemic Recovery Plan broke up in an impasse. The Recovery Plan forms part of the Commission’s budget or the 2021-27 Multiannual Financial Framework (MFF, Figure 1).
The plan is intended to help countries worst hit by the pandemic and in the words of the Commission, “there is no time to lose”. The European Council seems to be in agreement that the recovery plan is to be financed through EU Commission borrowing in the financial markets – a first for joint and mutual European Union (EU) issuance.
In contrast, how the plan and budget are implemented remains subject to much debate and the outstanding issues, as outlined by European Council President Charles Michel, are substantive:
the size and duration of the various elements of the recovery plan
the best way to allocate the assistance and the issue of loans and grants
questions relating to conditionality and governance
the size and content of the MFF and its financing, including own resources and rebates
The so-called frugal four – Sweden, Denmark, Austria and the Netherlands – put their views forward last week in a Financial Times opinion piece. They prefer loans and not grants, want the recovery plan’s duration to go to end-2022, are not happy about the plan size and want reassurance on governance.
The leaders’ first in-depth discussion on the plan was on 19 June and a final agreement will come later – the French and Germans are pushing for mid-July. Significantly, Germany takes over the EU Presidency on 1 July and German Chancellor Angela Merkel is siding with French President Emmanuel Macron on the plan’s outline and importance for the Southern European countries.
However, the frugal four could try to change the contours of the deal or even stall it. This would in turn enrage Italy and Spain who want the deal to be done as quickly as possible. Anecdotal reports suggest that after a quick reopening spurt, the Italian economy is returning to recession.
The design and financing of the plan have signaled greater coherence in European policy making and EU states’ agreement on its financing has generated excitement in financial markets. There is also awareness of Italy’s deep unhappiness over the EU’s handling of the COVID-19 pandemic itself.
Should the July meeting also end in serious disagreement, there could be renewed concerns about what shape the future of the EU could take and even where the monetary union stands.
Moreover, unless a resolution can be found soon and the European Central Bank can show it is acting within EU Treaty guidelines, a German Supreme Court ruling could prove disruptive to quantitative easing operations as soon as August.
Taken together, this would likely put Southern Europe bond spreads under renewed pressure and the euro could lose ground. An implication to consider for MSCI EMU Index equities is that investors in financials and especially banks will be disappointed should the EU fail to implement a coherent recovery plan, with the consequence of further increases in non-performing loans.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The views expressed in this material are the views of Fundamental Growth and Core Equity team through 23 June 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.