Europe: Debts, Budgets & Corona Bonds | The Corona Correction | Refinitiv
Welcome to the Corona Correction series in association with Refinitiv, and I'm your host, Roger Hirst. It feels like Europe has been lurching from one internal crisis to another for most of the last decade and Covid-19 is an exogenous shock that has reopened many of the old fiscal and political wounds. Only a few weeks ago, Corona Bonds were all the talk of the town. But it's gone very quiet on that front, so I asked Refinitiv's Chief Industry and Government Affairs Officer, Sherry Madera, about how Europe and its leaders were dealing with the crisis. As we consider the impacts of Covid-19 on the world, now is an interesting time for us to consider how it is that we are going to plan for the recovery. The economic recovery that we're already seeing is taking such an enormous hit on the world's economy. Some might think that the emerging and frontier markets would be the worst hit out of a crisis like this, but new data from the IMF is showing that actually the worst hit are also some of the worst that are affected by the health crisis. This includes the U.S. and notably in Europe, Italy and Spain. The reality is that there's always been a North versus South divide in terms of the fiscal responsibilities of the European Commission, and that's happening now as well. Weeks back, there was talk about a Corona Bond for Europe, and this is an instrument that's jointly and severally liable, something unique, something different for Europe to consider. And there was some great opposition from what is termed the 'frugal four' in Europe. That's Germany, Austria, Finland and the Dutch versus those that were very much encouraged by the idea of a Corona Bond; Italy, Spain and France. France, most notably. But this North-South divide is continuing to push forward, even as Corona Bonds are put to the side. Now a one trillion euro budget is the solution that is preferred by Europe, both in terms of the push by Christine Lagarde at the ECB, as well as Ursula von der Leyen, the head of the European Commission. They're both pushing for a one trillion euro recovery fund that comes into play as the budget. Now, this brings its own tensions politically within Europe. Eastern Europe are normally the net beneficiaries of the budget. Now they're having to play against the most needy in terms of those impacted by the virus. The Italy, the Spain. Indeed looking at how that money is going to be divided, should it be raised, is still up for debate. We're looking in the next few weeks as to how that money is planned to be dispersed. Is it a grant? Is it going to be able to be backed back and put out into the member states in a way that's fair and equitable? On what basis will that happen? Luckily, the European Commission has maintained its triple-A rating from Standard & Poor's as of last week, and therefore it allows it to borrow at a very favourable rate. Certainly more favourable than any of the Southern European nations that have most need for those recovery funds. Italy has already been issuing bonds and indeed those rates are much higher than the EC could be able to obtain those funds for. And should they be able to pass those good rates on to the member states, even if there is a slight uplift in that rate, that will be a beneficial position for Italy to be in, but it will take time and those details are still yet to be observed. So I think Europe is an area for watching, not only in terms of how they're dealing with an exit to the lockdown and the health crisis, but indeed how it is that they will be financing this recovery. Of course, everyone was looking at Brexit previously and how the UK's exit from the European Union was going to affect, this is only exacerbating the needs for a recovery fund and a change to the budget. All indications show that the UK will be leaving the EU as of December 31st 2020, and if that's the case there's already a hole in the budget, whereas the budget is needing to be much more significantly bolstered. So I think this debate will continue to rage. The concept of the Corona Bond seems to be put on ice for now, but the details as to how a 1 trillion euro budget would be leveraged, be able to be passed down into the member states in an equitable way and making sure the tensions between North and South and South and East maintain, so that actually the recovery is for all. And indeed, that the European Union maintains political stability. Europe's vast number of vested interests only tend to pull together when a crisis reaches a peak. And this was the experience of 2011 to 2012. And this time around no consensus on Corona Bonds was reached. And so the latest suggestion is a one trillion euro recovery fund, which is itself still going through rigorous debate. The key question is what does it mean for the euro? And if the U.S. monetary and fiscal response is larger and faster, logic might dictate that the U.S. dollar would weaken versus the euro. But a lack of direction in Europe will starve the region of incoming capital flows, whilst the Fed's backstop has been encouraging capital flight into the U.S. supporting the dollar. Therefore, a lack of decisive action by eurozone leaders could well keep the euro drifting lower against the US dollar, bringing into play a huge support level, which if broken, could see the euro quickly testing parity. We'll see you later with another update.