- 11 Aug 2020 10:18
#15112741
While the USD keeps on falling due to an unprecedented economic downturn and the pandemic which has spiraled out of control, the Euro keeps on gaining strength. Investors spooked by the possibility of a US crash due to an exploding federal deficit are moving money into the Euro.
While the Euro area has also been hit hard by the pandemic, the EU's response is actually strengthening the Euro, because every crisis is also an opportunity. Trump's yesterday-men don't understand this as they are stuck in yesterday's thinking just like they are stuck in fossil fuels instead of investing in new technologies and renewable energy.
Despite the economic challenges of the pandemic, the EU has decided to focus on green technology in its efforts to restart the economy.
What we can learn from Europe's response to the COVID-19 crisis
Euro Renaissance Emerges From an EU Deal That Changed Everything
While the Euro area has also been hit hard by the pandemic, the EU's response is actually strengthening the Euro, because every crisis is also an opportunity. Trump's yesterday-men don't understand this as they are stuck in yesterday's thinking just like they are stuck in fossil fuels instead of investing in new technologies and renewable energy.
Despite the economic challenges of the pandemic, the EU has decided to focus on green technology in its efforts to restart the economy.
What we can learn from Europe's response to the COVID-19 crisis
Europe came together to save its citizens, businesses and member countries during the COVID-19 pandemic, making it a role model for the world.
The EU’s bold monetary and fiscal response demonstrated solidarity and strengthened Europe’s position globally.
The European Green Deal will drive recovery in Europe and make European standards the world's standards.
The immediate reaction to COVID-19 in Europe was not exemplary. Critical medical health supplies were held in national warehouses while borders were closed, with a “my nation first” reaction, as European Commission President Ursula von der Leyen described it.
But Europe learned, and learned fast. Within weeks, European countries came together to save lives, jobs and businesses.
The first steps
First, the European Central Bank launched the €750 billion Pandemic Emergency Purchase Programme, a monetary package to counter the risks to liquidity and the outlook for the euro area. It was upgraded to €1.35 trillion just two and a half months later.
A massive pan-European crisis response package followed. The European Commission (EC), European Investment Bank (EIB) and European Stability Mechanism (ESM) agreed to finance up to €540 billion to help people, businesses and countries throughout Europe, including liquidity support to companies, funding for development of treatments and vaccines, and financing for employment as well as direct and indirect healthcare costs related to the pandemic.
Europe did its best to get back on track. Governments intervened with unprecedented support measures targeting households, businesses and self-employed. The EU supported national efforts by providing flexibility in state aid regulations and fiscal rules.
On the road to recovery
The economic shock was far more severe than initially anticipated. The IMF expects euro area GDP to contract by 10.2% in 2020, bouncing back with 6% growth in 2021 depending how the pandemic unfolds. Some sectors (aviation, tourism, culture and art) shut down completely for weeks, while others (energy, oil and gas, automotive) were severely hit. Supply chains were interrupted, which exposed the EU’s vulnerability and dependency on resources outside the trading bloc, especially for medical supplies.
The EU needed bold action to get economies moving again and ensure the bloc would emerge from the crisis stronger, not weaker. German Chancellor Angela Merkel and French President Emmanuel Macron proposed a €500 billion European Fiscal Response, on top of what countries planned to do nationally. This was increased to €750 billion by the European Commission and – after 90 hours of negotiations – agreed to by the European Heads of State and Government on 21 July 2020. It consists of €390 billion in grants and €360 billion in loans.
This is a historic event for the EU for several reasons.
First, the European Commission will issue more common debt on the capital markets (to be repaid until 2058), which could bring the European safe asset – together with EIB and ESM – towards €2 trillion.
Second, it is a step towards a stronger European common fiscal response in time of crisis, strengthening the position of Europe globally.
Finally, it shows real European solidarity. Money would flow from the wealthier countries to the hardest-hit and lower-income ones. This unprecedented stimulus package comes on top of an ambitious seven-year budget of the EU, or Multiannual Financial Framework (MFF).
Towards a green, smart and sustainable future
With the launch of the European Green Deal, the EU made a bold statement to become the global leader in green technologies and economic sustainability. The European Green Deal is now the growth strategy of Europe. The investments supported by the EU recovery package and budget will be fully in line with its objectives to have a climate-neutral economy. The EU Sustainable Finance Strategy and taxonomy will channel private capital to environmentally sustainable investments and unlock the full potential of capital markets to achieve the climate goals. This important policy initiative will trigger a substantial change in the investment mindset of the private sector. Furthermore, Europe is well-positioned in this role, as the euro is already the leading currency globally in green finance.
To stay competitive in the era of a rapid technological transformation, Europe needs to step up its investment in research and development and adoption of digital technologies and relevant skills. The COVID-19 pandemic revealed the importance of digitalization for businesses and the public sector. During the lockdown, firms and countries with integrated digital technologies have performed better than those that have not. The crisis triggered substantial and probably permanent changes in the way we live, work, shop and learn. This plan will ensure Europe reaches the forefront in the digital age.
Meanwhile, in the middle of the crisis, the EU agreed to move to the next stage of accession negotiations with North Macedonia and Albania. Rather than closing itself off, the EU continues building bridges. The cherry on the top is the July 2020 agreement on the entrance of Bulgaria and Croatia to Exchange Rate Mechanism (ERM II), which means that after two years, the two countries might join the euro; similarly, during the Eurocrisis, Latvia, Lithuania and Estonia joined the euro. This shows that crisis does not undermine the attractiveness of the union and the single currency.
Europe as a global role model
Despite the crisis, Europe has firmly stood by the concept of multilateralism – collaborating to seek solutions and showing solidarity with hard-hit nations within and – equally important – outside the European Union. Therefore, Europe has also looked beyond its borders, collecting €7.4 billion to support measures fighting COVID-19 and ensure poor countries have access to potential vaccines and treatments.
Europe has tried – with best intentions – to serve both its own and global citizens through a soft power well described by fellow Young Global Leader Anu Bradford in her latest book, The Brussels Effect. To put it another way, leading European standards often become global standards.
And in the COVID-19 crisis, Europe might be a role model, in the way it has protected its citizens, business and member countries – while at the same time, showing global leadership in the best interest of humanity.
Euro Renaissance Emerges From an EU Deal That Changed Everything
Money managers are the most optimistic they’ve ever been on prospects for the common currency after its best month in almost a decade. And demand for European assets is so high that the currency is within a whisker of being more expensive than the dollar for the first time since funding pressures jumped earlier this year.
That’s because the European Union’s landmark rescue fund has gone a long way in soothing concerns over the bloc’s structural risks, and efforts to control the coronavirus and reignite the economy look particularly promising compared to the U.S. Those factors are setting the stage for a long-lasting change for the euro.
“This is not a matter of growth this year or next year or predictions about the cycle -- it’s really something more structural,” said Nicolas Veron, a senior fellow at the Peterson Institute for International Economics. “The budget deal changes the way financial markets look at the euro zone in a significant way,” he said, adding that “it’s a big reinforcement of the EU and of the euro.”
Such is the euphoria over the turn in the euro’s paradigm that stocks, which typically see demand fall as their underlying currency strengthens, are rising as traders capitalize on growth differentials between Europe and the U.S. And the rates on some of the highest-yielding sovereign bonds in the 27-member bloc have plummeted to pre-lockdown levels.
The Big Shift
Underpinning the euro’s transformed fortunes is the EU’s landmark 750-billion-euro ($882 billion) package. The deal, thrashed out in July to support the economic recovery, succeeded where years of political wrangling had failed. The rescue fund, which will be financed by the sale of joint bonds, has helped calm fears of a breakup.
Coupled with European Central Bank’s quantitative easing programs, the difference in yield between benchmark Italian and German bonds, a measure of risk in Europe that soared in March, is now near the lowest since February.
“It’s a powerful story for the euro,” said Tony Small, head of European interest rate strategy at Morgan Stanley. “A big portion of the tail associated with a euro break-up will likely be perceived to have gone away, and will be replaced by an attractive high quality issuer, which will pull up the entire credit quality of the euro.”
The euro’s 4.8% jump in July sent the currency flying through a bearish trend line that capped gains since 2008, unlocking its potential for more rallies. It also spurred a rush among analysts to revise their forecasts higher.
And while the currency has taken a breather in the spot market in August, falling 0.2% to $1.1756 as of 4:59 p.m. on Monday, net-long positions in the security rose to an all-time high, according to CFTC data.
It’s Relative
The currency’s fundamentals look especially strong when compared with the dollar, which has seen net-short positions versus major peers rise to the highest since 2012, according to Bloomberg calculations of CFTC data.
A gauge for the greenback suffered its worst July since 2010, ending the month near the lowest level in almost two years. It’s being weighed down by the rising number of infections in the U.S., which exceeded 5 million, the nation’s fragmented response to the virus, a Washington standoff over a new economic relief bill, and what may be a contentious presidential election in November.
These risks play in the euro’s favor.
There are signs the euro area has succeeded in breaking the link between economies re-opening and the virus escalating, helping to boost forecasts for growth. Even though Europe’s lockdown and initial downturn were larger, gross domestic product is poised to expand 5.5% in 2021, about 1.5 percentage points faster than the U.S., according to estimates compiled by Bloomberg.
That’s only happened eight times since 1992, according to International Monetary Fund data.
Real Yields
Nonetheless, there are mounting concerns about new flare-ups in infections in Europe. The number of confirmed cases in Germany, the continent’s biggest economy, rose more than 6,000 in the seven days through Sunday, the most since May, according to data collected by Johns Hopkins University and Bloomberg News.
“The risks remain that new outbreaks will occur, particularly as we get into winter,” said Iain Begg, a research fellow at the European Institute of the London School of Economics. “But the range of policies -- both the economic and containment policies in Europe -- seems to me to be better-attuned to dealing with both the health crisis and the economic crisis than the U.S.”
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