The narrative propelling the euro remains unconvincing. The hype on the European Recovery Fund and the perception of a divergence between the US and Europe drove the biggest monthly rally in the euro in ten years. In our view, however, even if the Recovery Fund addresses some of the longstanding vulnerabilities of the euro, in practice it is not only relatively small, but it is also temporary[1]. Furthermore, the agreement on the Fund not only occurred in exceptional circumstances, following the Covid19 pandemic, but it also met with significant resistance from many Northern countries. We do not think such arrangements can be easily extrapolated.

At the same time, we find the idea of an economic outperformance of Europe unconvincing. Though the second wave of the Virus might have slowed the US re-opening, thus far US hard and soft data have consistently surprised on the upside – not to mention US earnings. We also do not subscribe to the view that the US policy response is lagging the European response.

The US reacted early to the crisis and had far more scope to deploy stimulus. Real 30-year rates in the US, for example, went from between +50bp to +100bp in 2019, to -45bp post-Covid. And finally, we find it unlikely that the European policy response will address in any way Europe’s structural challenges, including a declining labour force and the lack of competitiveness in many of the world’s high growth industries, such as tech. Thus, while we concede that the momentum in the euro over the past month has been strong, on a longer time horizon we find it difficult see European assets as offering any value relative to US equivalents.

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[1] This was underscored by the ECB, in a remarks by Executive Board Member Fabio Panetta on July 7th, 2020, ‘Unleashing the euro’s untapped potential at global level’


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