Europe Still a Mess, Equities Reverse Course

Posted on

April 24
Europeans fail to come to terms
IFO horrid
Covid cases appear to have peaked
Nikkei 0.87 Dax -0.70%
UST 10Y 0.61%
Oil $16/bbl
Gold $1727/oz
BTCUSD $7594

Asia and the EU
EUR EZ IFO -79.5 vs. -81

North America Open
USD Durable Goods 8:30
USD U of Michigan 10:00

European leaders failed to come to an agreement on a comprehensive economic relief package for the Eurozone disappointing investors and sending EURUSD below the 1.0750 level as markets grew increasingly frustrated with policymakers’ inability to respond to the COVID-19 crisis.

The EU Council did agree to let the EU Commission formulate a relief plan and figure out ways to finance it, but it’s clear that the Northern block led be Germany and Netherlands are resisting any notion of any shared fiscal responsibility that would distribute the burden of financing on those countries that run fiscal and trade surpluses.

Yet that precisely what needs to be done if Europe is to have any chance of surviving as a single economic block. One of the greatest ironies of the euro project is that it is the very countries that have massively benefited from a unified currency that are now the catalysts for its possible demise.

Germany now needs to decide if it wants to be German or European. There is no doubt the political costs for financing the profligacy of Italians and Spanish would be very steep for Ms.Merkel but the alternative would be much worse. Germany is the world’s greatest export nation on per capita basis and its economy was forced to go back to the DM its primary engine of growth would collapse under the much higher currency exchange regime.

For now, Germany continues to insist on enjoying the friction-free unified currency regime protection of the euro without shouldering the financial burden for the block. But with COVID-19 having thrown the whole continent into an unprecedented economic depression the days of kicking the can down the road are over. Europe needs a fiscal stimulus package of at least 3Trillion euro’s just to restart its economy and perhaps the compromise solution will be a clandestine MMT rescue with EZ not issuing Eurobonds but each sovereign issuing its own bonds with ECB buying up the full supply in each state.

It’s hard to imagine how the bond markets won’t be able to see through that ploy but barring a change of stance from the Germans that may be the only interim solution to save the euro.

Boris Schlossberg
Managing Director

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