Alberto Matellán, chief economist MAPFRE Inversion
The agreement for the European rescue fund has wider implications for euro investors than those that are implied in the actual figures or distribution. While these latest details are relevant to economic policy, the most important thing in terms of investment is the shift in mindset that has already taken place since April/May and which is the origin of the agreement. It has a positive impact on the value of assets in the European currency for at least three reasons.
Firstly, the implementation of the Fund can reduce the discrepancies in growth. European countries are facing the post-COVID period with very significant differences; they have different economic structures, they are using different fiscal policies depending on their spending capacity and they even have different ways of dealing with the pandemic. This makes the cumulative growth expectation for, say, Germany much more optimistic than for Italy or Spain. This discrepancy is a source of tension for Europe, something which we have experienced before. The bailout agreement amounts to a certain spending policy equalization in the Mediterranean countries, which is positive to the extent that it reduces these intra-European tensions.
Secondly, there is a new asset to invest in: the bonds issued by the European Commission. Investors will therefore already have an asset backed by the EU as a whole. For the purposes of market interpretation, the debt of each country’s treasuries will become implicitly supported, not only by the ECB but also by the EU as a whole. And this is the key: debt mutualization. Although this has not been done explicitly, the fact that there is now going to be an agency that issues debt and can spend with powers of control over national fiscal policies means that a part of the market is now interpreted as fully mutualized. This does not prevent possible negative effects, such as the classic crowding out against the financing of European companies. However, the combined effect is positive because it is offset by the increased appetite for assets in euros. In fact, it could act as a stimulus to improve financing via higher external flows precisely for this reason.
The third factor is the other side of mutualization. The agreement is the first step toward solving one of the key problems in the construction of the EU. Over the past 15 years, the latent risk of breaking up the euro has been constantly present in investors’ minds, putting a strain on the value of assets in Europe. At times this was clear, like in the 2011–2012 period, and at other times, it simply existed as a hidden threat. This was precisely because monetary union was not matched by fiscal union, so national governments had an incentive to pursue reckless fiscal policies with exclusively local aims. For many analysts, this would sooner or later signal the end of the Union. A first step has now been taken to eliminate that threat. And while there is still a long way to go before such a fiscal union becomes a reality, the shift that has taken place alone is enough to minimize the latent threat of a break-up of the euro.
In fact, these three elements have already been present in the markets for several months. The Merkel-Macron agreement in May and the German Premier’s statements about her European presidency was clear evidence of the shift in the mindset of the countries that were most opposed up until that moment. There are many reasons for this, but the fact is that no European government opposed the fundamental elements, especially the fiscal union. That is precisely why what has happened in recent months represents a key shift for the euro-asset investor; it leads to a higher relative appeal of euro assets and, consequently, to a recovery of the currency.
For some, this could represent a problem due to a possible negative impact on the external sector. But paradoxically, perhaps that is why it also forces more unity in Europe. The countries whose economies are most dependent on exports outside the EU are precisely those that are popularly regarded as the most anti-European, starting with Germany. This crisis is accelerating the trend that has already existed for a few years toward a reduction in world trade. European countries must therefore be more aware that they do need each other, which is probably one of the reasons for this change in mentality and one that will help maintain it over time. In any case, for investors, all this means that it is advisable to increase the weight of euro assets in portfolios, beyond short-term swings.