EU monetary and fiscal union to strengthen the euro – Morgan Stanley

From January 1st, 2010 through May 1st of this year, the euro has lost almost a quarter of its value against the USD and the performance of European equities, relatives stocks in the US, roughly halved. However, Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley, notes three encouraging developments to change the narrative.

Key quotes

“The region has been relatively successful in containing the spread of COVID-19, with case counts in sharp decline. EU 27, which has a total population of about 445 million people, has been seeing daily fatalities from this terrible disease in the low 300s. In the United States, which has a lower population of about 330 million, daily fatalities are roughly three times as high.”

“The ECB has been moving aggressively and last week voted to expand its bond purchases by a further 600 billion euros. I’d note that the idea of a highly supportive central bank has not always been the case for the Eurozone over the last 20 years. The ECB raised interest rates twice in 2011 and also did so in 2008, just a few months before Lehman Brothers failed.”

“For the first time, France and Germany, the two largest economies in the eurozone, proposed a regional recovery fund paid for by joint borrowing, backed by the entire region. And it’s asking that this economic assistance be largely in the form of grants rather than loans. Meanwhile, the funding for this aid would be through jointly backed issuance that creates a new safe asset for the region, much more similar to a US Treasury.”

“We think these proposals are a significant moment for the eurozone. For currency markets, we think they’ll cause the euro to strengthen. In bond markets, we think they’ll help narrow the spreads between other countries and Germany. And for equity markets, we think they’ll help encourage a rotation towards companies in the periphery and out of the high-quality defensive stocks that have previously been driving Europe’s market.”



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