A new recovery plan

Article about A new recovery plan

Oct 17, 2020

The second Corona wave is causing unrest in the euro area. Measures to combat the virus are depressing economic growth, but the differences between countries are considerable. Vulnerable countries are hit much harder than strong ones, which can again create political tensions. The euro seemed to be saved for the time being by the first recovery plan, but a second recovery plan is inevitable. This also means that the final unity from the first half of the year will be put to the test.

The differences between European countries can be seen in the various purchasing managers’ indices. An index ranking above 50 indicates growth and clearly below 50 indicates contraction. Spain is again hit hard, with the index falling from 48.4 in August to 44.3 in September. France is doing only slightly better at 48.5, while the German economy continues to expand at 54.7. Europe as a whole is more likely to contract in the fourth quarter.

Spain is worst off in terms of Corona infections, with more than 300 per 100,000 inhabitants now resulting in the complete closure of the capital Madrid. But bars and pubs also remain closed in France. The economic impact of the measures is much greater in southern European countries than in the north. In Spain, the tourism sector accounts for around a quarter of the economy, including the effects on the cultural sector, shoppers and other leisure activities. Nor is it the case that these sectors had a good summer season in southern Europe. This means that there is an increased risk of companies getting into trouble and thus infecting other parts of the economy as well. Without measures from the ECB and the European recovery plans, a large proportion could collapse rapidly. In a black scenario, it is possible that half of the southern European companies will not survive this crisis. Incidentally, southern Europe is already starting in the winter sports areas, which are also facing a bad winter. The big question is whether the euro can survive such a black scenario.

European countries that focus on exports, such as Exportweltmeister Germany, are benefiting from the strong recovery in world trade. Indeed, the world outside of Europe is experiencing growth. In China, growth is so strong that the renminbi is gaining in value. Even in Brazil, consumer demand is once again above pre-Corona levels. The US economy is currently growing by more than 35 annualised. The recovery in the North is necessary to close the gaps in the South. But solidarity in Europe is wafer-thin. At the moment, the European economy is still supported by monetary and fiscal measures, but when the difference between winners and losers has become unbridgeable, the euro will come under further pressure. For home biased investors: remember that the euro area only accounts for around 10% of the world index. Look for investor happiness in the East, where economies have fully recovered from the Corona crisis.

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Articles authored by Robert Jan Teuwissen

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