News
A one-legged Europe no more?
Bruno Cavalier
Chief Economist at ODDO BHF
To move forward, it is preferable to have two legs than one. To stabilise the business cycle, it is better to be able to intervene from two angles - monetary and fiscal. Europe's framework up is such that fiscal policies are decentralised and therefore uncoordinated and suboptimal. EU-wide fiscal stabilisation does not exist. In emergencies, (almost) everything lies on the ECB's shoulders. This can pose problems, as we were recently reminded by Germany's constitutional court. The crisis means that we need to rethink how the EU policy-mix is organised. In this article, we review the fiscal proposals advanced by Germany and France and taken up by the Commission, along with their implications for the ECB.
Rebalancing the policy mix in Europe
We hesitate to start with Jean Monnet’s quotation about Europe being forged during crises1. It has been wheeled out so often over the past ten years that it seems somewhat outworn now. But we must acknowledge that it suits the current circumstances. First, Europe is going through a dire economic crisis, unprecedented in peace time. Next, this crisis highlights the extent to which the policy-mix is incomplete and unbalanced. Everywhere else, in emergencies, fiscal and monetary policies are combined. Europe lacks a central fiscal mechanism designed to stabilise the business cycle, to such an extent that to move forward, it needs to walk on just one leg. In other words, it needs to rely on the ECB alone, which is the subject of much criticism2. Two recent events have prompted the ECB’s role to be reconsidered, and, by extension, Europe's policy-mix. One is the German constitutional court’s ruling of 5 May. The other is the fiscal initiative proposed by Germany and France on 18 May, forming the cornerstone of the Recovery Plan proposed by the European Commission yesterday.
➢ The ECB in the current crisis – the ECB truly grasped the gravity of the situation on 18 March. In an unscheduled meeting, it created the € 750bn Pandemic Emergency Purchase Programme (PEPP) intended to prevent spreads widening within the zone and the fragmentation of financial conditions3. Since the start of March, the ECB’s balance sheet has inflated by almost € 900bn (table lhs). This mainly involves extending liquidity lines for banks and buying securities on the credit markets, principally via the PEPP (chart rhs).
1 "Europe will be forged in crises, and will be the sum of the solutions adopted for those crises." (Memoires, 1976)
2 See our Eco Note of 10 October 2019: “ECB: a critique of the critiques”.
3 See our Eco Note of 19 March 2020: “From Draghi’s big guns to Lagarde’s PEPP-Show”.
Disclaimer:
This publication is produced by ODDO BHF Corporates & Markets, a division of ODDO BHF SCA (“ODDO”), which is licensed by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the Autorité des Marchés Financiers (“AMF”).
This document, when distributed outside of the U.S., is intended exclusively for non-U.S. customers of ODDO and cannot be divulged to a third-party without prior written consent of ODDO. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been developed by our economists. It does not constitute a financial analysis and has not been developed in accordance with legal requirements designed to promote the independence of investment research. Accordingly, there are no prohibitions on personal dealing ahead of its dissemination. “Chinese walls” (information barriers) have been implemented to avert the unauthorized dissemination of confidential information and to prevent and manage situations of conflict of interest.
At the time of publication of this document, ODDO and/or one of its subsidiaries may have a conflict of interest with the issuer(s) mentioned. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context which is subject to change without notice. The statements, assumptions and forecasts contained in this document reflect the judgment of its author(s), unless otherwise specified, and do not reflect the judgment of any other person or of ODDO. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this document is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This document is for institutional investors only. It may not contain information necessary for others to make investment decisions. Consult your financial adviser or an investment professional if you are not an institutional investor.
Disclaimers for Distribution by ODDO BHF New York Corporation to United States Investors:
Please refer to the most recent research reports on the subject companies for complete information and relevant disclosures.
This document is produced by ODDO BHF Corporates & Markets, a division of ODDO BHF SCA ( “ODDO”). It is distributed to U.S. investors exclusively by ODDO BHF New York Corporation (“ONY”), MEMBER: FINRA/SIPC, and is intended exclusively for U.S. institutional customers of ONY and cannot be divulged to a third-party without prior written consent of ONY. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document is being furnished to you for informational purposes only and should not be relied upon as sufficient to form a basis for any investment decision.
At the time of publication of this document, ODDO, and/or one of its subsidiaries may have investment banking and other business relationships with any of the companies in this report. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. However, ODDO has no obligation to update or amend any information contained in this publication. Past performance offers no guarantee as to future performance. All opinions expressed in the present document reflect the current context which is subject to change without notice. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of particular clients. Clients should consider whether any advice or recommendation in this document is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This document is not a research report as defined in FINRA Rule 2241(a)(11) because the material in it is limited to one or more of the exclusions of the definition of research report in Rule 2241(a)(11)(A). This document is for institutional investors only. Consult your financial adviser or an investment professional if you are not sure you are an institutional investor.
Disclosures Required by United States Laws and Regulations:
Rule 15a-6 Disclosure: Under Rule 15a-6(a), any transactions conducted by ODDO, and/or one of its subsidiaries with U.S. persons in the securities described in this document must be effected through ONY.
Contact Information of firm distributing investment recommendations to U.S. investors: ODDO BHF New York Corporation, MEMBER: FINRA/SIPC, is a wholly owned subsidiary of ODDO BHF SCA; Philippe Bouclainville, President ([email protected]) 150 East 52nd Street New York, NY 10022 212-481-4002.
Statement of conflict of interests of all companies mentioned in this document may be consulted on Oddo & Cie’s research site .
Our news
European investors’ attention increasingly turns to bond markets
European government bonds experience unusual volatility in the start of the year. Over the past 12 months, the yield on 10-year German Bunds fluctuated within a range of 2.08% to 2.66%. The past week saw a sharp surge, however, with the 10-year yield jumping from 2.38% on 28 February to 2.93% on 12 March. Following snap elections on 23 February 2025, the CDU and CSU entered exploratory talks with the SPD,
Mr Trump's tariff machine gun and Mr Merz’s fiscal bazooka
‘There are decades where nothing happens; and there are weeks where decades happen.’ This quote from Lenin comes to mind in view of the recent upheavals in the world caused, directly or indirectly, by Donald Trump. In recent weeks, there have been changes not seen for decades.
AI and Healthcare: what opportunities lie ahead?
An interview with Brice Prunas - Artificial Intelligence thematic manager - ODDO BHF AM on Health & Artificial Intelligence