Page 9 - ISQ UK July 2020

JULY 2020

Where Next for the Eurozone?

Chris Bailey, European Strategist, Raymond James Investment Services

The Eurozone has not had an easy last ten years, buffeted
between internal discord, sluggish growth and strained In the midst of every crisis, lies great opportunity -
diplomatic relations with Russia, the U.K. and the United Albert Einstein
States. Whilst certain regional companies remain world
leaders, regional stock markets have typically lagged So far, so textbook. The Eurozone’s problems have never
global benchmarks and the sustained policy of negative been with its central bank since the previous president Mario
Draghi’s ‘whatever it takes’ Damascene conversion. Such
interest rates by the European Central Bank (ECB)
willingness to embrace an extended balance sheet has
appears further away from a conclusion than ever. created powerful enemies over the years. Whilst the German
Bundesbank maintained a policy of tentative and mild
Despite this unpromising backdrop, the pandemic crisis
tentatively has caused a rethinking of previous orthodoxies support at best, the country’s Constitutional Court materially
and hardened negotiating instincts. And whilst the heavy toll upped the ante in May by calling the ECB’s bond-buying
across families and broader populations throughout all powers into question.
western European countries - but especially Italy and Spain It goes without saying that this was at face value extremely
- will not be forgotten, the crisis of yet another period of unhelpful. However, acute observers would have noted at
economic growth challenge has led to some surprising the time the frustration towards the court espoused by
reactions. German Chancellor Angela Merkel, whose final years of
direct political power have been riven with challenges. Last
Christine Lagarde’s first few weeks as President of the ECB autumn my own conclusion was that the impending
did not get off to a particularly smooth start, with a fumbled chancellorship election due two-thirds of the way through
answer about sovereign bond spreads in her inaugural press 2021 would induce her own Damascene conversion to a
conference inducing volatility in the deeply influential world of legacy enhancing unbalanced fiscal budgets. The
Italian bond market. Lagarde’s years as head of the conclusion was correct, but the transmission mechanism to
International Monetary Fund, however, put her in a good get there was very, very different.
position to both help forge compromises and respond to a
burgeoning crisis by further heightening and extending the
central bank’s quantitative easing policies.

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