Beyond the deal

The US risk-taking on the pandemic front did not pay. While this week the first estimates for Q2 GDP will likely reveal a much deeper recession in the Euro area than in the US in the spring, in contrast the summer rebound looks more promising in Europe than in the US. The progression of the virus in some of the new US hotspots is slowing down, but it is now clear that the normalization of activity – from a too elevated circulation of the virus when the lockdowns were relaxed – was premature. The labour market is showing some signs of relapse as well. This creates a policy headache: the US government has already spent a lot, engaging in “overkill” support in our view, testing the patience of the fiscal hawks in the Republican party. The weekly 600 dollars top-up to unemployment insurance is expiring at the end of the week. Negotiations will run in overdrive in Congress this week. More stimulus is likely to come – given the electoral calendar -but we think it will be less generous.
In contrast, Europe “looks good”. Of course, the EU has its issues as well. Even if the pandemic is in better control in Europe than in the US the recent flare-ups in several countries and the first signs of internal EU borders closing again are concerning – but  it is managing to come up with policy solutions which may not move the dial much in terms of immediate macroeconomic support but at least send a positive signal to public opinion and investors. Given the complexity of the EU institutional set-up and how far apart the initial positions were, the agreement in the Recovery and Resilience Fund is very reassuring. Once again, the usual “existential concerns” about the future of the EU have been put to bed.
Still, many concessions have watered down the initial Franco-German proposal. Governance could be cumbersome and from a macroeconomic point of view the direct additional stimulus to expect from the RRF should not be overstated. Fundamentally, delivering on the EU’s “own resources”, on which a lot remains to be negotiated, will be key to determining whether a proper fiscal union is on the tracks. From a financial point of view, this will also be crucial to assess the chances of the EU to become a perennial major player on the bond market, turning the euro into a fully-fledged alternative to the dollar as a reserve currency.