In order to contain the second wave of the COVID-19 pandemic, most European countries have implemented new lock-downs starting from Mid-October. As the Chart of the Week with data extracted from Google Mobility shows, the new “soft lockdowns” were overall significantly softer than the “hard lockdowns” implemented to contain the first wave of the pandemic, earlier this year in […]
The pace of recovery of the Eurozone economy following its sharp contraction in 2Q 2020 slowed down significantly in August. The Eurozone PMI Composite Index came up at 51.9, still largely in positive territory but significantly down from the 54.9 level reached in July. The Manufacturing Index remained on a healthy recovery trajectory thanks to the strong rebound observed in Germany (cf. our Macro Flash on German Manufacturing PMI) and despite the stagnation observed in France. However, the Services headline index came almost flat at 50.5, due to a marked growth slowdown in France and a return to contraction in Italy and Spain. Regardless of the softness observed in the Services sector, Confidence about the future continued to peak up reaching its highest level in two years. This confidence will need to be supported by additional monetary and fiscal stimulus, else it could fade out. Indeed, Eurozone inflation moved into negative territory for the first since 2016 and unemployment continued to grow across the Eurozone which bodes ill for domestic demand, especially given the record savings growth due to precautionary motives.
The final German Manufacturing PMI for August was up at 52.2 from July’s final 49.0. The figure was less upbeat than originally thought as it came 0.8 points below its earlier published Flash estimate. The New Orders improved sharply at 59.1 alongside Future Output (Expectations) at 60.8. However, some weaknesses remain as factory jobs were cut again although the rate of job shedding was the weakest in five months. This indicates that a reversal could happen as the initial Business output and confidence upturn observed in July-August comes following a plunge in manufacturing activity in 2Q 2020. The mechanical “rise from the abyss” effect may fade out in the coming months and the recovery may peter out if the underlying drivers of growth – i.e. domestic demand and external demand – do not live up to their current expectations.
– Most European Banks are resilient to the economic fallout from the Coronavirus crisis as they enter into the crisis with significantly improved solvency indicators, compared to a decade ago.
– However, this resilience masks structural weaknesses which translate into lower performance and market valuations amid persistent banking fragmentation alongside national markets within Europe
– The Banking sector in Europe seems ripe for another wave of consolidation. The big question is whether regulators are also ready for that. The ECB seems to welcome this process but the challenge comes from other market regulators.
Following the meeting of its Governing Council on June 4, the ECB announced an extension of its Pandemic Emergency Purchase Programme (PEPP) with an additional enveloppe of €600 billion. The total asset purchases made by the Eurosystem (ECB+ National Central Banks) to counter the coronavirus crisis including PEPP and additional APP purchases is now expected to reach almost €1.5 trillion. The bleak outlook for inflation shows the profound deflationary forces at work in the Euro area. Judging from the experience of the last few years, we believe the ECB’s assessment of an uptick in core inflation by 2022 to be too optimistic.
the European Commission unveiled a €750 billion “Next Generation” recovery programme (€440 billion grants, €60 billion guarantees and €250 billion loans) over the 2021-2024 period. The Next Generation programme would preallocate funds to the Member States prioritising the green and digital transitions mainly through the Recovery and Resilience Facility (€560 billion). It includes additional cohesion funding for €45 billion. As we show in our analysis, Italy, Spain, Poland, Greece, Romania and Portugal would be the main beneficiaries of this proposal which is likely to meet resistance from the “Frugal four” (Netherlands, Austria, Sweden, Denmark).
For the first time in EU history, fiscal expenditure would be financed through debt issued by the European Commission and backed by all the Member states, along the line of a French-German proposal. However, while this proposal is a welcome step toward fiscal integration, it is still short of a Hamiltonian moment for Europe”. The countercyclical policies needed to close the output gap left by the coronavirus crisis will still have to be conducted at the Member State level.
There are at least two ways to read the decision rendered by the German Constitutional Court – BundesVerfassungsGericht or BVerfG – on May 5, 2020 (BVerfG, Urteil des Zweiten Senats vom 5. Mai 2020), in the case opposing the ECB to a group of complainants claiming that the Frankfurt-based monetary institution went beyond its legal mandate, when it decided in March 2015 to launch a large scale asset purchase programme (APP) targeting first and foremost government bonds. We can read it through the lenses of an Economic Policy or through the lenses of a Constitutional law and Politics. From both perspectives, the ruling contains useful insights that clarify some complicated institutional questions and shed light on economic policy options available to the ECB and to EU/Eurozone Member States. The fact that this ruling comes in the midst of an unprecedented global economic crisis, stemming from the radical measures enacted all over the world to combat the coronavirus pandemic, makes it even more critical for investors to understand its rationale and contending claims.
A Pandemic OMT – P-OMT – might well be the most appropriate solution in the current context – and perhaps the only one that is available, especially if discussions around a common Eurozone fiscal package fail to produce meaningful results – in order to support individual Eurozone member countries, while preserving the overall financial stability of the Eurozone and the autonomy and credibility of the ECB.
Habemus Governum. It took months to reach an agreement between the competing “anti-system” parties that have emerged from the last Italian general elections, the M5S and the Lega, and to get the approval stamp of the President of the Republic, Sergio Mattarella, on the proposed Cabinet members, which was effectively achieved after a reshuffle of the […]
Interview of Alexandre Kateb on Dukascopy on the economic situation in the euro zone and the outlook for the major currencies