WHILE Washington dominates the headlines, Europe is back from a scorching summer with its own set of headaches.
Here are three things markets are watching: a fraught European budget season, a drumbeat for joint euro debt and a look at super rich trends on the eastern side of the Atlantic.
Seasonal chill
‘Tis the season and all that. European government budget season kicks off in September and runs through the autumn and tends to be a nervy affair for euro sovereign bond markets.
This year, inflation stoked by the Iran oil shock and the European Central Bank’s (ECB) rate hike in response – along with spillovers from volatile US Treasury and Japanese government bond markets – is making for a more hair-raising autumn than usual.
The picture is further complicated by messy domestic politics in the Big Three eurozone economies, leaving budget-setting fraught.
France stands out, with its 2027 presidential election now in view and the real prospect of either a far-right or far-left candidate entering the Elysee after April’s vote.
TS Lombard’s Davide Oneglia thinks there is a real risk this stalls agreement on the upcoming budget, with a chance no budget will be agreed until this time next year.
Another 0.5-percentage-point rise in the deficit would bring it close to US levels of about 6% of gross domestic product.
French 10-year OAT or government bond yields are at their highest in 18 years, the borrowing premium over Germany is back to its level two years ago at the height of the last budget crisis, and high-flying French bank stocks have recoiled.
Italy’s political landscape and budget process have been a good deal more stable in recent years, as evidenced by the historically unusual sight of its 10-year BTP or government bond yields trading below France’s.
But Rome may be in for a rougher 2027 as speculation swirls about a general election as early as April, when France goes to the polls, and right-wing Prime Minister Giorgia Meloni faces pressure from Futuro Nazionale, a new party even further to the right of her coalition.
Germany’s politics are no tidier.
Even though there’s no federal election, there are three more state elections next month that, as ING’s Carsten Brzeski puts it, set the “political weather” in Berlin.
Chancellor Friedrich Merz’s popularity is low, and the far-right AfD party is polling strongly in at least two of those states.
If euro bond markets get nervier – or global bond-market anxieties overwhelm them – how soon will speculation about using the ECB’s Transmission Protection Instrument (TPI) to limit excessive intra-euro bond spreads start to circulate?
Bonded?
Even if the TPI were not used, or were not enough to calm a euro bond squall, the risks may refocus minds on joint euro issuance.
Numerous proposals for jointly backed eurozone or European Union (EU) bonds have been put forward in recent years, and the latest paper on the subject was published on CEPR’s VoxEU site this week.
The economists reckon the 2024 reform of EU fiscal frameworks still falls short in two areas: in a deep recession, the frameworks offer too little fiscal flexibility to head off deflationary stagnation and, perhaps, too much to allay national debt sustainability concerns.
The paper argues that “a Eurobond-financed common fiscal capacity can mitigate both tail risks.
“Under this proposal, stabilisation of exceptional common shocks is shifted to the euro-area level while responsibility for national debt remains firmly national.”
Outside severe shocks, the economists argue that Eurobonds can be used to finance large European investment programmes – as joint debt has been used since the pandemic in 2020.
But the use of joint debt for budgetary issues has been resisted many times in the 27 years of the euro.
The moment may finally have arrived – although the very fractious European politics that bring the thinking back to the fore may be the same upheavals that make joint action less likely.
Euro billionaires
German investor Klaus-Michael Kuehne, the controlling shareholder of Swiss logistics group Kuehne + Nagel, died aged 89 on Monday.
His holdings across numerous businesses were reportedly worth some US$44bil, ranking him Europe’s seventh-richest person on Forbes’ list.
That has piqued interest in how many billionaire investors, executives or entrepreneurs Europe has versus the United States – and whether public policy should take a position on the emergence of such a super-wealthy class.
Bruegel senior fellow Rebecca Christie, for example, wrote this month about the pros and cons of the super-rich, a subject that seems egregious to many given the sheer scale of wealth and inequality.
“It seems preposterous that any individual requires as much wealth as some tycoons have amassed.
“Yet there are clear benefits to the economic dynamism that has fuelled their ascent.
“Policymakers now must figure out how to court them, tax them and regulate them,” she wrote.
But if you thought Europe was well behind the United States on this score, the numbers might be surprising.
Forbes puts the number of American billionaires at 989, while the number in Europe overall – including Britain and Switzerland as well as the EU – stands at 875. — Reuters
Mike Dolan is a columnist for Reuters. The views expressed here are the
writer’s own.
