June Starts With A Bang

Ironically, the pandemic and progress toward a vaccine will play second fiddle to more mundane concerns in the week ahead. Still, investors have shown that the most strained relationship between the US and China in 30 years (Tiananmen Square) is insufficient in the first instance to derail the recovery equity markets. Major benchmarks in the US, Europe, and Asia reached new recovery highs.

European heads of state will have a difficult situation later this month when they meet to find a compromise on the Recovery Plan. The UK, in part, has left the EU because many felt it has lost its voice as more countries joined.

However, the shift to qualified majority voting from unanimity was not complete, and the decision about an EU-level response requires the assent of all members. It used to be that when Germany and France agreed, it would drive Europe. Not so quick this time.

The Berlin-Paris proposal has run into opposition by two blocks. The first is a set of European countries that want loans, not grants. Some fear that those who clamored that the proposal was a step toward fiscal union - even though it is debatable and that many on the center-right in Germany, for example, perhaps even Merkel, does not believe it is - are right and do not want it. Others, in Eastern and Central Europe, cringe at the Franco-German condominium and these proposals, ostensibly in their name, without consultation.

German officials, including Merkel herself, seemed to play down the likelihood that an agreement will be reached at the summit toward the middle of the month. The funds proposed by the EU are relatively modest (750 billion euros) given the number of members (27) and the size of GDP (~17 trillion euros).

Still, for some countries, the funds could make more than a marginal difference. Enthusiasm should be tempered by the fact that what happens in an emergency or war cannot often be extrapolated to more normal times.

However, the lasting value may lay in the construction of scaffolding for the next fight over the European Project, including the strengthening of the role of the European Parliament. The EU bonds could also provide a new benchmark for Europe, which can enhance the euro’s international role. The ECB may not be the only central bank to buy them.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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