JP Morgan: A Small Step Towards Financial Integration, A Giant Step Towards the Euro

JP Morgan: A Small Step Towards Financial Integration, A Giant Step Towards the Euro

Last week, the EU region took a giant step for a more financially integrated Europe, with all the 27 leaders of EU member states and the European Commission approved a joint COVID-19 crisis recovery fund proposal. Gabriela Santos from JP Morgan noted that this recovery plan was a small step for financial integration, but it was a giant step for European and European assets that performed 174% lower performance in US dollars in the last decade. “The details include 52% from grants and the remaining € 750 billion bailout package (5.4% of GDP). There are several transformational views: 1) financing common EU bonds with large issuing, 2) financing debt from the EU budget and 3) allocating funds according to needs, not countries. " “While high-debt countries like Italy, Spain, Portugal, and Greece will receive more funds by contributing, high-income countries will be clear contributors. Most importantly, high-borrower countries will finance these funds with the European Commission's AAA rating rather than their low ratings. However, EU countries have never agreed on financial federalism at this level before. " “Now the population is disappointed because it lacks the benefits of the union, and there is less risk of voting to leave the project completely. This low risk of breakage means that European assets need to add less risk premium, thus providing higher equity valuation, lower bond spreads, and a stronger currency. " “Although there is more optimism about European stocks in the past two months, it is far from an overbought asset class. There are still many reasons to make 240 billion USD out of European equity funds in the past 30 months. ''