GDP figures for the second quarter of 2020 revealed the carnage wreaked by government shutdowns. The EU was no exception, contracting by around 12 per cent compared with the previous quarter. But GDP figures are inherently backward-looking. There are other—more timely—straws in the wind that suggest the EU will bounce back faster than most. And that is making investors, in a phrase not heard in a long time, bullish about Europe.
Until a vaccine is widely distributed or a treatment discovered, economic performance will be largely dictated by Covid-19. This means good virus management is crucial for recovery.
In the second quarter of this year, most EU countries imposed strict and effective lockdown measures compared to others, most notably the US. Once EU countries had managed to “flatten the curve,” they could ease restrictions. Now US and UK measures are more stringent, particularly compared to Spain, Italy, Germany and France. While some European countries have seen new outbreaks, as of late summer, none had experienced the massive jump in new cases that had caused some US states to reverse their reopening plans.
The impact of reopening on growth is already apparent in the data. Consumption constitutes around two-thirds of growth in most mature economies, and consumer confidence has improved across Europe since March. It initially improved in the US but then dipped significantly in July. According to Google Community Mobile Data, the number of visits to cafés, restaurants and entertainment venues has bounced back much more quickly in the EU than the US or UK. In August, reservations on the restaurant booking platform OpenTable were actually up in Germany compared with a year earlier, but down nearly 14 per cent in the UK and over 50 per cent in the US.
The EU may not just be outperforming in terms of virus management, but economic policy as well. Millions of Americans watched Congress bicker about a new fiscal package as their enhancements and protections expired in July, leaving them with a sharp cash crunch. The UK government is allowing its furlough scheme to wind down, pushing the cost onto struggling businesses that may have to lay workers off.
In stark contrast, EU leaders agreed a historic deal in July whereby the EU will issue €750bn in common debt to distribute as grants and loans. The new Recovery Fund takes the EU a step closer towards the fiscal coordination that has been so sorely lacking since the birth of the single currency. The allocation of funds is linked to the extent of economic damage, providing much-needed relief to weaker countries hit hard by the virus and hamstrung by high debt levels. While the so-called “Next Generation EU” fund is meant to be an emergency facility, an important template for fiscal solidarity is thereby set.
The result of all this is that Europe is now a more attractive investment space. The euro recently had its best month in a decade. With interest rates likely to be low in the eurozone for the foreseeable future, equities should offer higher returns, particularly in countries that have announced big fiscal packages—such as Germany—or that will provide significant stimulus thanks to those recovery funds—such as Italy and Greece. Leisure, travel, retail and manufacturing are likely to remain EU laggards while coronavirus persists, while healthcare and IT should continue to steam ahead. After years of weak performance, EU banks should be buoyed by a relatively strong economic bounce back. European stocks have underperformed for some time, but “Buy Europe” might finally be a more attractive strategy, even as the UK settles its divorce with the continent.
