Unpacking the EU’s historic coronavirus recovery plan
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Research Analyst Brian Yadao discussed the details behind the European Union's recently unveiled coronavirus relief package. They also discussed about the latest efforts by the U.S. Congress to extend federal unemployment benefits beyond July.
EU to issue joint debt as part of COVID-19 stimulus agreement
In a historic deal, European Union (EU) leaders agreed 21 July to a €1.8 trillion spending package to combat the economic damage wrought by the coronavirus pandemic. The package consists of a €750 billion recovery fund, and a €1.1 trillion budget from 2021-2027, Ristuben said.
"There's a strong need for fiscal stimulus in Europe to keep the economy running at a reasonable rate and minimise the damage caused by the collapse in demand among individuals for goods and services," he explained. In a nutshell, governments typically create demand for economic goods and services in a recession via fiscal spending, Ristuben said.
The package is principally aimed at economies in Europe that have been weakened most by the coronavirus, such as France, Spain and Italy, he noted. The recovery fund itself consists of €390 billion in grants and €360 billion in loans - a structure which Ristuben characterised as significant.
"The idea behind a grant is that the money does not have to be paid back. This is very important for Europe, because it means that individual countries won't be adding to their debt burdens," he stated, noting that this is especially significant for debt-plagued member-states like Italy and Spain.
The most significant aspect of the package, in Ristuben's opinion, is that the money for the relief fund will be raised collectively by the issuance of Eurobonds. Eurobonds have been proposed before in prior crises, but have never seen the light of day, he said. "This marks the first time Europe has actually agreed to issue debt jointly. This a potentially huge deal, if it sticks, because it addresses one of the fundamental flaws critics have had when it comes to fiscal cohesion in the EU," Ristuben remarked.
Congress debates new coronavirus relief package
Turning to the U.S., Ristuben noted that Congress is weighing a second coronavirus relief bill, which could include an extension of the $600-per-week federal unemployment benefit set to expire at the end of July. With the resurgence of COVID-19 infections in the U.S., some states have rolled back portions of their reopening plans, he noted, leading to worries over a fresh round of economic pain.
"Because of this, there's a perceived strong need in financial markets for an extension of unemployment benefits," Ristuben stated. If this doesn't happen, markets are likely to be extremely disappointed, he said, adding that the expectation is that a new spending package of some sorts will ultimately be passed.
"Right now, the Republican party is talking about a $1 trillion relief package, but negotiations within the party are still ongoing," Ristuben said. The package would likely including spending on education, liability protections for hospitals and businesses and another round of stimulus checks for individuals, as well as extensions to unemployment benefits and the Paycheck Protection Program, he noted. Currently, the proposed legislation does not include a payroll tax cut, as Senate Majority Leader Mitch McConnell wants to keep the price tag for the bill around $1 trillion dollars, Ristuben said.
The current expectation is that Congress will pass a relief bill sometime around the first week of August, he concluded, noting that the recent rise in U.S. weekly jobless claims lends further urgency to the need for additional fiscal support.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.