The Source of Europe’s Recent Green Shoots

Has Europe’s time to shine arrived? Eurozone stocks are up 47.0% since their March 18 low.^[i] As is the case stateside, many credit European policymakers for powering the rebound. In our view, this is a misperception. We think countries’ reopenings matter more, and the latest data out of Europe reveal promising economic green shoots—signs of what we think stocks have been anticipating over the past two months.

When the COVID crisis went global, European policymakers implemented similar measures to their developed world counterparts: The ECB ramped up its quantitative easing (QE) program, and national governments announced fiscal measures to aid afflicted industries. Yet some commented these plans trailed America’s in size and scope, which included Congress’s CARES Act and a multitude of “extraordinary” Fed measures. In recent weeks, the Europeans have seemingly bolstered their efforts. The EU’s 2021 – 2027 budget proposes €750 billion in coronavirus relief, funded in part by newly issued common EU “coronavirus” bonds and serviced by direct Brussels taxation. The ECB increased its QE program by €600 billion, bringing the total to €1.35 trillion. Even Germany, which many consider a bastion of fiscal discipline, announced a €130 billion spending package. Headlines cheered the plans, with many pundits seeing them as essential to a recovery.

We agree these announcements may have positively surprised investors, buoying short-term sentiment. Many likely didn’t anticipate the breadth of Germany’s spending plan given the country’s frugal reputation. Save for the 2008 – 2009 global financial crisis, Germany has resisted calls for stimulus spending over the past 30 years—even during the eurozone’s 2011 – 2013 recession. Similarly, past proposals for collective EU or eurozone debt have stirred excitement—only to have politics sap the momentum.

But our view of European policymakers’ plans mirrors our view of American plans: The economic benefits are limited at best. This is perhaps even truer in Europe’s case. Granted, Germany’s plan has a wee bit more “traditional” fiscal stimulus—i.e., spending to create new demand—than America’s CARES Act, which is akin to a bailout or bridge loan. In particular, Germany’s “future package” allocates €50 billion to research on artificial intelligence and quantum computing, as well as electric car infrastructure spending. Yet government spending’s benefits don’t materialize overnight. In the EU budget’s case, funds won’t be deployed until March 2021—and even then it won’t happen all at once. By the time this “stimulus” works its way into the economy, a recovery may already be well underway. As for the ECB’s policy shifts, more QE is a counterproductive headwind for the economy since it flattens the yield curve—discouraging banks from lending.

In our view, the path to recovery lies not with policymakers’ pronouncements, but with how quickly businesses and consumers can get back to some semblance of normalcy. Countries worldwide effectively put their economies in institutionally induced comas to stem COVID-19, and recent data reveal the economic downturn’s historic severity. Many experts forecast a slow, years-long recovery, but ongoing reopenings could lead to a quicker-than-anticipated rebound.

European nations have made steady progress on the reopening front. We detailed those developments in our 5/18/2020 commentary, “Reopening in Europe and Australia.” One notably absent piece then was travel. But in the weeks since, many European nations have taken steps here, too. All EU nationals can now go to Italy and, starting next week, Germany and France. However, other countries, like Spain, the Baltic nations and the Netherlands, are implementing “travel bubbles”—allowing nationals from some countries and not others, depending on varying criteria. Policies aren’t uniform, but opening up European summer travel—particularly in the four biggest Continental economies—is likely better than many projected a couple months ago.

As for COVID itself, Europe’s peak in cases appears to be past, and we haven’t yet seen major resurgences in reopened economies. New studies also raise questions about how potent a second wave will be—if one arises at all—since more people than realized may have COVID immunity.^[ii] An Oxford theoretical epidemiology team posits COVID-19 isn’t as virulent as feared since many people may have built up resistance from exposure to other coronaviruses (many of which cause a common cold)—an idea known as “cross-immunity.”^[iii] These researchers argue COVID’s death rate is more likely between 0.1% and 0.01% rather than the dire estimates of 1%.^[iv] Work is ongoing, but as experts continue learning about COVID, we think it is worth noting that nothing about a debilitating second wave is inevitable.

Moreover, policymakers won’t necessarily repeat the same tactics in response to new flare-ups. France’s chief pandemic advisor said the government may resort to localized lockdowns instead of a national one if COVID returned.^[v] Economists and other researchers have proposed more nuanced, targeted strategies that seek to balance virus containment without forcing all businesses to close.^[vi] Spain and France, for example, are following a “green zoning” strategy, which allows or curtails travel in an area based on factors like infection rate and testing.^[vii]

While economic conditions remain weak, the latest high-frequency data suggest activity is returning. In Germany, the truck toll mileage index—which tracks large trucks’ distance on German highways—saw a steady uptick in May after plunging in April.^[viii] German restaurant reservations have also rebounded bigly, albeit coming off a decimated base.^[ix] In Spain, credit card transaction data in brick and mortar stores improved from April to May, consistent with the country’s gradual reopening progress.^[x] In France and Italy, trips to retail recreation spots—think restaurants and shopping centers—have started to rise, also in line with easing restrictions.^[xi] Flight traffic over the Continent has picked up, too.^[xii]

Make no mistake: These high-frequency figures reflect narrow slices of the economy and lack the detail of more comprehensive datasets. Moreover, like their official counterparts, these data lag markets and aren’t some magical investing edge. Regardless, though, they illustrate potentially promising green shoots that hint at the simple power of relaxing COVID restrictions—and perhaps a preview for upcoming economic conditions as reopenings continue.