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The EU is Stepping up to the Plate
The European Union has brightened its outlook with a new €750 billion spending plan and relatively successful management of the pandemic. But is it enough to overcome this deep recession? Our Chief Investment Strategist EMEA & APAC, Wouter Sturkenboom, explores the issue.
The European Union has brightened its outlook with a new 750 billion euro spending plan and relatively successful management of the pandemic. But is it enough to overcome this deep recession? Let's take a closer look.
Approval last week of the recovery fund shows that European Union member states understand the significance of this moment. The Union is more than a convenient trading relationship. Words like solidarity and joint effort have been given meaning. And using part of the money to invest in digitisation and green policies means Europe is looking to the future as well.
The plan accelerates Europe's momentum on other fronts to fight the devastating impact of the coronavirus on people's lives, the economy, and companies. The European Central Bank has aggressively provided monetary stimulus and increase its flexibility to take action. It also deftly navigated that legal hiccup with Germany's Constitutional Court. Looking ahead, it is clear the central bank will push for further integration while ensuring interest rates remain low across the region. This is a major change for the better.
Further, the European Union has been relatively successful in containing the virus's spread, allowing the economy to reopen. New daily cases have risen slightly in the past few weeks, but are still less than a tenth of those in the USA. And daily deaths continue to decline, dropping below 100 in July.
Of course, vigilance through continue testing, tracking, and tracing is still required. But the virus is currently largely under control. This means the reopening can continue, and with it, the economic recovery.
To be sure, there is still a long way to go for Europe. The economic hole is deep and the recovery will take time. The global divergence in health trends all but ensures that economic growth engines like trade and tourism, both important to Europe, will stay in the doldrums.
Investors have given economic resilience the benefit of the doubt with a global market rally. But that has made stocks somewhat pricey, and we have lowered our risk stance to a moderate underweight position. Still, we think investors can take some solace from the fact that Europe is taking the right steps to soften the economic fallout.