Blain’s Morning Porridge – July 21st 2020: Ode To Joy? Why Not!

Blain’s Morning Porridge – June 21st2020: Ode To Joy? Why Not! 

“Europe will not be made all at once, or according to a single plan..”

The big news this morning is the EU reaching an agreement on its’ Euro 750 bln rescue fund and a total €1.1 trillion EU budget, after its longest ever, five-day, marathon negotiating session.  Ode to Joy is blasting round the halls of Berlaymont, but it’s hardly the symbol of solidarity Macron, Merkel et al are claiming between the member states. Its pragmatism in action as the frugal four/five (depends if you count Finland) were bought into line with promises of rebates, Hungary got away with Orban’s war on democracy, while Poland wriggles out of carbon neutrality by 2050 and can keep burning coal. 

It would be easy to pick holes across the whole conflabulated deal, but why snipe?  We should celebrate Europe reaching agreement. The market loves it…

The major point of friction over recent days was grants versus loans. The deal splits into €360 of loans and €390 of grants to aid Covid recovery across Europe, with the costs to be borne by all the members, in practice meaning the 12 net contributors.

The Frugal North wanted Italy – because this is mostly about bailing out Italy – to be on the line for any money it receives. Instead, Italy gets €82 bln of handouts from Brussels, which will help enormously…. to finance all sorts of murky goings-on? Or, who knows… some of it might even go to boosting Italian employment as the virus recession deepens.. Italian bonds have tightened on the news. Italy will claim a victory.

Let’s not be negative..  This morning’s agreement is another step in the EU’s slow and painful path towards a Federal Europe. Much to the chagrin of Brexit-supporting, EU-hating Tory skeptics – Europe is getting there, plod by agonising plod.  Sure, there are massive cracks in the edifice, which are disguised by slapping on a veneer of Polyfilla that will need fixed again in a few years time.. but its slowly happening.. 


My big concern for Europe is that’s it’s becoming just too huge a project to succeed. European unity was working well, through closer economic ties and friendly political links, open borders and a common market boosting recovering post war economies, but then it suddenly became a confused rush and embrace an ill-conceived common currency and unwished for political union. 

It’s now become even more complex than building La Sagrada Familia in Barcelona, and less well defined in terms of plans.. 

All the energy that’s been expended on the “Project” is effort that, perhaps, could have been used better to create wealth, jobs and prosperity across a Europe of diverse but closer links, allowing the process of gradual integration, generation by generation to meld us together.  Instead, the EU has become a massive state bureaucracy primarily concerned with consolidation and re-distribution rather than the creation of national wealth.  

Europe’s economy is still limping from the last Global crisis in 2008 – hamstrung by the interlinked failures of Austerity, Debt and the Euro. To get Europe back on a growth track it has to be honest about why its underperforming – and that’s broadly because the Euro was adopted to early and without any understanding of its consequences. 

The long-term success of Europe will depend on creating a vibrant economy right across the continent. If they are planning to get there.. then they should not be starting from here. Go back. Start again.

Let’s not kid ourselves that handing €82 bln to Italy and sloshing another €300 bln of dosh around Europe is going to cure the Virus recession, solve youth unemployment or create a level productivity playing field. European Unity is a fantastic idea – but in practice its difficult. Very difficult when you have such a range of diverse and sometimes defunct economies with different tastes for democracy, law, order and occasional levels of pandemic graft. But… long-term, little steps move the European project forward.. step-by-tiny-step. 

Generation by generation Europe will become a single state. 

Meanwhile.. back to the deal: Last night’s agreement will be financed by allowing the European Commission to issue bonds of 3-30 year maturities on behalf of the European Union to directly fund loans and grants to member states. That is the critical step forward.  The bonds are direct and unconditional obligations of the EU – there is no joint and several liability. The EU has established itself as a sovereign borrower in its own right. Funds raised under the programme are lent or granted back to back to the beneficiary country. 

Apparently, it was a cracking meeting – full of drama and bluster. France and Austria haven’t had a dust-up like that for decades. The point of friction was loans vs grants. There will be some noise in the EU parliament as the deal is rubber-stamped, but EU voters don’t get a say – at least until their next elections. That’s going to be interesting as Anti-EU parties exploit the narrative the rich 12 net contributor nations shouldn’t be paying for their southern and eastern brethren. 

The EU is rated AAA/Aaa/AA by Fitch, Moody’s and S&P. Fitch expects member states will provide extra funding above budget contributions to repay EU debt, and that guarantees by member states have been provided. Moody’s notes the EU’s balanced budget principle (!). S&P focuses on the fact it’s relying on the 12 wealthiest net contributor nations to effectively pay for all 27 members. 

The ECB will be able to buy the bonds.. and who knows… get a taste for yield curve control of its very own yield curve! Where should EU bonds price? A slight discount to Germany? 

Five Things to Read This Morning:

FT – Is the rebound in America’s economy already over?

BBerg – The Inside Story of How Europe Landed its Massive Stimulus Plan

BBerg – Jeff Bezos Adds Record $13 bln to His Fortune in Single Day

WSJ – Stocks Rise as Investors Weigh Vaccine Hopes

Torygraph – Is Britain prepared to go nuclear over China?

Yesterday’s article about the Comet spawned some very interesting replies… Some folk were very angry I didn’t seem to be taking markets terribly seriously, while others thought I had turned into some dire apocaplyse predictor. Nope.. I wrote about the Comet because it interests me….. if you did get a chance to see it, let me know what you thought! 

Out of time and back to the day job!

Bill Blain

Shard Capital