Germany’s chancellor Angela Merkel has finally acceded to a French plan to issue a common European bond, say Matthew Karnitschnig and Rym Momtaz in Politico. The proposed €500bn vehicle would borrow from financial markets and give grants to countries in need. The proposal is simple, says former European Central Bank (ECB) economist Lucas Guttenberg: “European bonds for EU expenditure”.
Some have gone so far as to speak of Europe’s “Hamiltonian moment”, says the Financial Times: a reference to the US federal government’s decision to assume state debts in 1790, which knitted together the young United States.
But for now, such talk is overheated. This plan falls far short of full fiscal union and could yet be watered down because of opposition from the “frugal four” of Austria, Denmark, the Netherlands and Sweden. Still, this “Eurobond trial balloon” is a powerful symbol of German commitment to the euro, says Katharina Utermöhl of Allianz.
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Markets were cheered by the Franco-German announcement, which came as lockdowns were eased in many parts of the continent. The pan-European Euro Stoxx 600 index advanced by 3.7% last week. German investors’ confidence hit a five-year high in May.
The Stoxx 600 is still down 17% since the start of January, underperforming both the US and China. A crucial weakness is the region’s shaky banking sector. The Stoxx 600 Bank index has tumbled by an eye-watering 43% this year, note Jan-Patrick Barnert and Michael Msika on Bloomberg. Trading on just 0.4 times book value, Europe’s banks have never been cheaper, but few want to have a nibble. Negative interest rates, large loan-loss provisions and a shaky growth outlook are scaring off all but the bravest.
Tech sector eclipses banks
Staid European markets are weighted towards mature industries such as banking, carmakers and oil, while America has its high-growth tech sector to thank for consistent investment outperformance. Yet the rout in European finance means that the picture is changing, says a research note by Morgan Stanley. For the first time, technology is a bigger part of the European index than banks. Once accounting for one-fifth of the value of European shares, today the region’s banks make up just 5.6%, compared with 7% for technology.
Developed European markets trade on a cyclically-adjusted price/earnings ratio of 15.7, a bargain compared with America’s 26.8. With the ECB poised to provide yet more liquidity by expanding its €750bn bond purchase programme, that leaves European shares well placed to outperform when the recovery eventually arrives.
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