The €750bn EU Recovery Fund will be inadequate for the size of the problem now facing Europe.

In Italy, The Governor of the Bank of Italy, Mr Ignazio Visco has warned that ‘as the pandemic continues families and business will batten down and massive monetary and fiscal intervention will be needed’ His concerns were echoed by the OECD who have run stress tests on national economies. The worst-case scenario saw national debt in Italy rise to 195% of their annual GDP, 158% for Portugal and 229% for Greece. Without some form of debt unification within Europe these debt levels are unsustainable. It is becoming clear that the €750bn EU Recovery Fund agreed in the summer will be inadequate for the size of the problem facing Europe. With the recent agreement from Germany, the EU now has the powers to borrow capital on the open markets to support fiscal policy. This agreement was meant to be a short-term facility but is now looking more likely to be a permanent feature. There is a further €500bn of ECB QE planned for December but these figures are modest compared to the response by the Federal Reserve.

Another national lockdown in Spain, Portugal or Italy leading to a double dip recession in the southern peripheral nations will bring the issue of national debt levels to a head. The northern bloc of nations of Germany, The Netherlands, Austria and others, will be under pressure to face up to the ultimate EU decision. Will Europe go forward with a collective budget, banking and debt ownership policy, in essence a United States of Europe, or will nations have to fend for themselves and independently manage their own debt levels. For this key reason we are happy again to remain very underweight in Europe.

The issue of national debt is not unique to Europe. The debt surge is happening throughout the world. In June this year, the IMF forecasted that the average global public debt would hit 103% of GDP up from 83% in 2019. For developed country’s this percentage rises to 132% of GDP. Much of this new debt has been bought up by quantitative easing programmes. Between them the US Federal Reserve, Bank of England, Bank of Japan and the European Central Bank have created US$3.8tn in new money.

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