Page 10 - ISQ UK July 2020

INVESTMENT STRATEGY QUARTERLY

Government support as a percentage of GDP

UK

France

Italy

Germany

0 10 20 30 40 50 60

Total Loan guarantees Tax relief Cash payment
Source: Bruegel

Possibly influenced by her own scientific background but (for example the United States). Recent weeks have seen
certainly backed by an efficient and effective administration, plans and actions - led by Angela Merkel - to forge the first of
the German pandemic response has impressed many neutral these instruments. With Germany holding the rotating
observers. Looking beyond the bald healthcare numbers presidency of the Council of the European Union until the
and statistics, Germany was also most proportionately end of 2020, there has never been a clearer opportunity to
responsive in areas such as loans and associated financing push the button on such an initiative. Again, this is no
opportunities to business to tide them over the pandemic panacea, but it reflects both the Eurozone and the European
period. Certainly, there is something about a truly exogenous Union continuing to grow up. It is just a shame that it took
crisis such as the COVID-19 pandemic that highlights, even such a crisis to open up such a potential policy shift.
to a country that prides itself on business efficiency and high
productivity, that material assistance - even of an anticipated Meanwhile, for asset allocation experts whose default
temporary nature - is required. Supplement this with the position has been to underweight both the region’s financial
costs of a wage support scheme and Germany’s very markets and the Euro, it should induce a reassessment. ‘In
orthodox balanced budget position had shifted, at least the midst of every crisis, lies great opportunity’.
temporarily, to a material deficit position.

Contrary to the instincts of many arch Euro-sceptics, the KEY TAKEAWAYS:
really big heavy lifting fiscally across Europe is still
undertaken by the national governments. Unsurprisingly, • The pandemic crisis tentatively has caused a
the crisis has produced a slew of national government fiscal rethinking of previous orthodoxies and hardened
initiatives boosting budget deficits to levels that would have negotiating instincts.
provoked anger and sanctions at previous crisis times in the • Influential has been Germany’s shift from a balanced
Eurozone. At this time, supplemented by the ECB’s continued budget position to, at least temporarily, a material
efforts, these are being funded at strikingly low bond yields. deficit position.
Whilst this may appear to reflect a coordinated monetary • There has never been a clearer opportunity to push
and fiscal policy, the dearth of a central fiscal lever sourced the button on a pan-regional fiscal policy initiative.
straight out of Brussels and used as a supplementary fiscal
boosting tool in the most impacted parts of the whole • Such a policy could induce a reassessment from
Eurozone, was missing. Such pan-regional fiscal rebalancing global asset allocation specialists to the region’s
is a function of all successful monetary unions financial markets and the Euro.

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