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The EU sets out the risks

The European Union now expects an even greater hit to its output this year from Covid-19 but political wrangling means it is yet to agree a stimulus package.

The European Union now expects an even greater hit to its output this year from Covid-19. But political wrangling mean it is yet to agree a stimulus package.

Charles Stanley

in Features; Fiduciary news


The European Union (EU) has provided us with its summer forecast. It revised the Spring estimates downwards, taking the Euro area to minus 8.7% GDP this year, down from a previous forecast of 7.7%. The following year it sees a 6.1% bounce back, leaving the Euro-area economy down 1.7% for the two years combined.

Within that forecast, Germany and the Netherlands do comparatively well, with modest declines, whilst Spain, France and Italy are all expected to fall by at least 11% in 2020. The UK is between the two groups at minus 9.75% and still included in the forecast.

The statement was far from encouraging. It said: “The EU will experience a deeper recession this year due to the coronavirus pandemic, despite swift and comprehensive policy response at both EU and national levels. Because the lifting of lockdown measures is proceeding at a more gradual pace than assumed in our spring forecast, the impact on economic activity in 2020 will be more significant than anticipated.”

This statement is a little misleading. The recession was brought on by the government measures themselves, taken to stop the virus. The EU’s own recovery measures have not yet been agreed, let alone coming into effect. This summer forecast needs to be seen as the necessary backdrop to the discussion still underway over whether there should be a €750bn recovery fund and, if so, who receives the money and who is responsible for repaying it? The EU is willing to portray a darker picture to argue the member states into line for the stimulus fund, and for a larger seven-year budget settlement for the Union.

Merkel bounce

Angela Merkel has regained power and stature thanks to the way the pandemic has played out in her country and there has been a strong rally in her opinion poll ratings as a result. She has also decided to put her political weight behind the idea of an EU recovery fund borrowing money on the EU’s own credit rating, with implicit consent to risk pooling and offering more of it to the deficit countries of the south who need more stimulus.

The prudent four countries that are holding out against the scheme, may be won round with further concessions or limitations on the balance between grants and loans and the terms of repayment of the underlying borrowings. The delays mean that the EU cannot make much contribution to recovery this year. All of the arguments about the fund relate to the next seven-year budget settlement period starting in 2021, and the fund, if agreed, will spread its actions over more than one year.

This leaves a divided EU, with a bigger gap again between the prudent and successful northern countries and the deficit and more virus damaged southern countries. The President of the Council in a recent speech has tried to bring them together around the Commission’s chosen theme and aim of green growth. The hope is the money from the fund and from the new budget can be oriented more towards investment and subsidy to promote electric vehicles, green heating of homes and renewable energy.

The irony is Germany at the heart of the project has a long way to go to convert her auto industry away from successful diesel and petrol products. German energy and manufacturing needs to wean itself off gas and coal. It is going to take a lot of recovery fund money to make the massive shift to zero-carbon when you look at the huge dependence on Russian gas, residual coal and the internal combustion engine. Meanwhile, the US technology industries drive on, fuelled by plenty of easy money and Donald Trump’s carbon-based independence. Nasdaq outperformed Eurostoxx by another 10% last quarter. It is taking too long to put in place the fiscal boost at EU level, leaving the EU writing down its own recovery to try to get political change.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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