Think About This - EUreka August 10, 2020 | Page 2

Think About This
INVESTMENT RESEARCH
EXECUTIVE SUMMARY
• The EU has made another giant leap towards integration (following ‘whatever it takes’ monetary policy).
• This time the change is debt mutualisation and indirect fiscal transfers in the face of the Coronavirus
pandemic.
• This move opens the way to further economic policy harmonization and reform in Southern European
states.
• It is good for peripheral Government bonds in the region and relatively cheap regional bourses.
• It is also good for the Euro, resolving a significant structural weakness.
• We raised the Euro and European (industrial) assets to Positive and Neutral recently. This move increases
the confidence we have in such a move.
With the announcement of the €750bn
Coronavirus recovery fund the EU has just taken
another step towards integration. This addendum
to the €1.1tn, 7-year budget essentially subsidises
individual Government budgets over a multi-year
period from the pooled budget of the European
Commission. The recovery fund consists of
€360bn in low-interest loans available to all
members of the bloc (to be repaid over a 30-year
period) and €390bn of grants to member states
hardest hit by the Coronavirus.
Italy and Spain are expected to be the main
recipients. They are likely to receive €150bn of
grants and €230bn of loan between them.
Not only have these states been hardest hit by
the virus, but these states also have some of the
highest debt burdens and unemployment levels
in the bloc. Since spending exceeds the EU’s
budgeted payments, the European Commission
itself will issue debt and borrow from financial
markets. This will be the largest ever borrowing
by the EU. Taxpayers of wealthy nations like the
“Frugal Four” (Sweden, Denmark, Austria, and The
Netherlands) are liable for the spending of
Southern European states. This is debt
mutualisation; it is an overt transfer mechanism
from North to South to maintain the EU’s
integrity.
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