Listen to the podcast below to hear about this week’s update about Europe, Unemployment, and some good news.
Today I want to talk about Europe – specifically the Eurozone aka EU. There has been debate over the years whether or not it will survive. Each country has a different language, culture, and government. Yet as part of the Eurozone, countries are required to share open borders, a common currency –called the euro, must have a stable democracy and accept EU legislation.
Not much has been written about the July 21st agreement reached by the 27 member countries in the European Union. But in hindsight it may become viewed as a major step forward to strengthening their influence on the world stage.
While travel within the Eurozone and having one currency makes life easier, it is hard to maintain when there isn’t one central authority able to issue debt. Each country issues its own sovereign bonds. You may recall hearing about countries such as Italy and Greece on the verge of defaulting on their debt.
Within the EU the Southern countries such as Italy, Spain and Greece haven’t been fiscally conservative to improve their economies going forward.
There are sometimes ill feelings towards Germany and France, healthy economies that are the two largest and to some degree influence policy within the eurozone. Their economies depend heavily on exporting to other member nations.
The political situation in recent years adds to the precariousness of the EU. There has been a lot of anti-EU sentiment – think Brexit but politically this sentiment is elsewhere in Europe too. At the other end of the spectrum is a group referred to as the Frugal Four – Austria, Denmark, the Netherlands and Sweden. They are fiscally conservative trying to get southern Europe to stop spending so freely.
Enter COVID-19. It changed everything. Now there is a common enemy and solutions needed that apply to all. Hardline positions held by some members became more flexible.
The coronavirus reached Europe before the U.S. The shutdowns were longer and stricter (except for Sweden) but they gained control of the virus except for a few hotspots. Recognizing how poorly we were handling the pandemic, it didn’t take a genius to see a global recession was on the horizon.
According to John Mauldin of Mauldin Economics, “the core problem: it’s hard to sustain common policies and/or a common currency without a central authority that can issue common debt. And to do that, the central authority needs taxing power.”
The most influential leaders in the EU are German Prime Minister Markel and French President Macron. Kudos to both of them for recognizing the issues and negotiating solutions. In the Eurozone, any taxation must be agreed upon unanimously by all members. There were days and nights of intense negotiation so all 27 members agreed.
The legislation passed creating a European Union Fiscal Plan – a giant step towards a stronger future. The key points are:
- A $1.2 trillion stimulus plan
- The European Union will be able to have deficits in response to economic shocks. Previously, a balanced budget was required.
- Debt will be backed by all members so, for instance, there will no longer be Italian bonds that must be paid back only by the Italian government
- Investments as part of the stimulus package will lean towards “green” projects and technology.
- A formula was agreed upon to distribute grants based unemployment rates and contractions of GDP.
- It creates a framework for mutual assistance in future crisis
Because Europe has gained control of the virus before the U.S. the expectation is their economies will recover faster than ours. Your portfolio includes exposure to international companies to take advantage of potential stock market gains.
On another topic, I wanted to comment on the unemployment numbers released on Thursdays. I believe they are quite misleading because it doesn’t include people on federal unemployment programs. If those numbers are added back in, the total unemployed increases from about 16 million to about 31 million. Then there are the people who get paid “under the table” as my dad used to say – they are paid in cash.
Again, the headlines present a misleading number. It is one of the reasons why we feel the stock market is at unsustainable levels and eventually will decline. As we’ve mentioned before, we’re always available to discuss your investment allocation.
Now for some good news.
I don’t know if you remember drive-in movies. I have a fond memory of being a sophomore in high school going on a first date with a senior who had a car. You guessed it; we went to a drive-in movie with another couple. They had liquor. It was my first taste of beer and I realized it was never going to be the drink for me. Anyway, Walmart is going to host drive-in movie nights at 160 store parking lots until the end of October. It will give families the opportunity to have a night out safely.
Another piece of positive news concerns ventilators. We’ve all heard about the shortage of ventilators and that they are expensive. Since March, over 180 volunteers ranging from doctors to engineers to what are called tinkerers worked to design a cheaper ventilator. Good news. The FDA gave emergency approval to the new ventilator to be used on patients. One of the fun facts – the interface software was designed by the Jeopardy Teen Champion. He’s 18.
Lastly, I’ve been to Antarctica and enjoyed seeing penguins but with global warming their numbers are dwindling. Recently, satellites identified 20% more Emperor Penguin Colonies than we previously thought existed.
So until next time, please stay safe and well.