The euro has been enjoying its longest rally since 2011, gaining 4.5% against the dollar since the end of May and eclipsing $1.1384 to the greenback. And European stocks have started to outperform US markets in the past few days.
Chalk it all up to better news. The continent has endured a painful slump, with the European Central Bank (ECB) forecasting an 8.7% fall in eurozone GDP this year. Yet things are on the mend,says Morgan Stanley. Purchasing manager indices and gauges of mobility and electricity usage suggest that the economy hit a trough in April. “The recovery is already under way.”
Long criticised for its frugal budgets, Berlin has rushed to the rescue on this occasion. Emergency measures to guarantee loans, cut taxes and boost electric-car uptake amount to €1.3trn, more than 35% of GDP. A generational shift has made German officials more pragmatic about borrowing than in past crises, says Derek Scally in The Irish Times. The European Central Bank also cheered markets last week by unveiling an expansion of its quantitative easing programme, whereby it buys bonds with printed money, from €750bn to €1.35trn. The move ensures continued downward pressure on financing costs for European businesses, says Jim Armitage in the Evening Standard.
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The Franco-German plan to launch a common €750bn European bond also underpins the rally, says John Authers on Bloomberg. Markets hope that this step towards fiscal union will deliver a “Hamiltonian moment”, akin to the US federal government’s 1790 assumption of state debts. Common debts may ultimately pave the way for more EU-wide tax-raising powers, a crucial plank of genuine fiscal union. This crisis could prove a “historic moment in the European project”.
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