Chart of the week - Europe: great pr ogress – but not a “Hamilton moment”

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●  Crises can be catalysts of progress: For the EU and the Eurozone, the envisaged €750bn recovery fund marks a major step forward. If handled well, it will help the European economy to emerge stronger from the pandemic. But it does not come close to a “Hamilton moment”, similar to the US fiscal revolution of 1790 when the first US Treasury Secretary Alexander Hamilton persuaded the often heavily indebted federal states of the US to cede some fiscal control to the union in exchange for federalising their debts. Europe will remain a work in progress, advancing modestly with each major challenge in its unique way without turning into a system controlled by a central power in Brussels.Â

●  Size matters: To the €750bn recovery fund, we can add €100bn for the EU’s “SURE” scheme to support under- or unemployed workers and a €200bn increase in the lending capacity of the European Investment Bank (EIB). The share of the 19 Eurozone members of the total €1,050bn should be roughly €900bn. Including the €75bn which those member states who need it may draw from the European Stability Mechanism (ESM), the total of almost €1trn amounts to c9% of the Eurozone’s estimated annual GDP in 2020. It is arguably the most generous cross-border support programme ever. Of course, the money will be spent over a number of years, mostly in 2021 through 2024, rather than in just one year.

●  No full fiscal union: Despite the huge numbers, the recovery fund and the other joint responses to the crisis will not take the Eurozone much closer towards a full fiscal union. To some extent, member countries have been sharing risks for a long time already. They all guarantee common bonds with their share in the capital of, or their contributions to, the EU, the ESM and the EIB. Once the new programmes have been fully funded, the jointly guaranteed bonds will amount to some c14.2% of total sovereign (plus EIB) bonds in the Eurozone, up from 7.5% now – see chart.Â

●  Not a done deal: So far, the €750bn fund is no more than an idea. Negotiations will be tough, especially with the “frugal four” led by Austria, who prefer a smaller loans-only facility. We expect some progress but no breakthrough yet at the 18-19 June EU summit. Still, an idea hatched by Germany and France and immediately endorsed by Italy and Spain – together 75% of Eurozone GDP – carries weight. It looks likely that something similar to the European Commission proposal will be agreed by the end of 2020. German Chancellor Angela Merkel has finally realised that she needs to make southern Europe a generous offer to safeguard European integrity and her European legacy. For her, it will be the top priority while Germany holds the rotating presidency of the European Council in H2 2020.

●  A strong signal: That Germany now favours generous solidarity within Europe is a strong signal on its own. It will now be less easy for radical populists to whip up anti-EU sentiment in Italy. Regardless of the precise timeline and details of the final deal, this helps to contain the tail risks that anti-European populists may eventually take power in Rome and toy with the idea of leaving the euro. Of course, Europe will need to see to it that the money is spent well, tying generous grants to some pro-growth reforms which Italy needs even more than the money.

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

Florian Hense

European Economist

+44 20 3207 7859

florian.hense@berenberg.com

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