Page 7 - ISQ UK Aprl 2020

INVESTMENT STRATEGY QUARTERLY

Continental Europe
Chris Bailey, European Strategist, Raymond
James Investment Services Ltd.

‘There are decades where nothing

happens; and there are weeks where
decades happen’
― Vladimir Ilyich Lenin

Very sadly, official national government statistics show that - at the The next few weeks will also be highly influential in the COVID-19
time of writing - three out of the five countries suffering the most battle. Despite the distressing images and flow of statistics,
COVID-19 related deaths are from the eurozone. The reason that tentatively the most impacted eurozone countries are bringing new
Italy, Spain and France have been so impacted partially reflects the cases, hospitalisations and (with a lag) death rates under control as
open nature of the pan-European economy with material tourism, lockdown periods extend closer to the duration of a few weeks. As
travel and trade links, partially an ageing population and partially with other western countries, the challenges of restarting economies
relatively large centres of population. What cannot be criticised is coherently and in a sustainable manner await beyond the overt
the application and rigour of key healthcare workers and national virus suppression periods.
governments. The latter has seen multiple new fiscal expenditure What also awaits is a deeper discussion about the cohesion of the
and support plans, including the overt ending of the German European Union. Whilst pan-European institutions and structures -
balanced budget rule. Sadly this latter event - which many eurozone such as the euro - remain broadly popular, the COVID-19 crisis has
watchers had been requesting for a considerable period of time - highlighted again that pan-European policymakers are relatively
needed the impetus of a truly international crisis (and the high slow moving compared to single country national equivalents,
likelihood of a sharp economic contraction) to occur.
albeit that when finally roused into action, they can be surprisingly
From a broader European Union perspective however, policy material in the extent of their policy prescriptions. Much of these
cohesion cracks have been exhibited. Whilst the European Central discussions can wait for later in the decade. After all, with the
Bank under Christine Lagarde was quick to offer unlimited support retirement from front line politics of the current German Chancellor
in both words and actions, an institution already with its key Angela Merkel still set for next year, much is naturally going to
monetary policy instrument set at a negative interest rate level can change within the pan-European political scene.
only offer so much new support. Meanwhile, the continued debate
- as opposed to action - over the potential use of truly pan-European
level instruments including ‘coronabonds’ issued by the European
Stability Mechanism (a European Union agency that provides KEY TAKEAWAYS:
financial assistance, in the form of loans, to eurozone countries or as • Three out of the five countries suffering the most
new capital to banks in difficulty), has shown the difficulty in COVID-19 related deaths are from the eurozone;
coordinating a series of national governments. This is especially
true when agreeing to the use of such instruments is highly likely to • Multiple new fiscal expenditure and support plans,
mean an effective transfer from the more fiscally prudent northern including the overt ending of the German balanced
European states led by Germany, to typically less fiscally prudent budget rule have been announced in recent weeks;
southern European nations. • Expect an announcement during upcoming weeks of
new eurozone level initiatives.
We have been here before with the European Union, most
pertinently with the Greek debt crisis but also in the recent Brexit
discussions. In both events, last minute deals were struck when
none appeared likely. Equivalently at the time of writing, current
rumours surrounding the rolling out during the second quarter of
2020 of a de-tuned ESM loan initiative accompanied by an EU-wide
unemployment scheme persist. Expect an announcement during
upcoming weeks.

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