The sugar rush from Monday’s Franco-German proposal for a 500 billion-euro ($546 billion) Recovery Fund has faded quickly on Tuesday, with European stock markets mostly succumbing to profit-taking rather than extending gains.
By 5:30 AM ET (0930 GMT), the benchmark Stoxx 600 was down 0.8%, while the French CAC 40 was down 0.9% and the Italian FTSE MIB was down 1.2%.
That may seem odd, given how much has been said and written about the importance of Europe acting together and pooling its fiscal firepower. If adopted, the proposal can be a first big step towards a more comprehensive fiscal union, which banishes the threat of a eurozone breakup for good, bringing huge benefits for business and investor confidence.
However, Tuesday’s reaction is consistent with the fact that the idea still has many hurdles to overcome before it can become reality.
Other language in the proposals harks back to ancient desires of Paris to soften EU state aid rules and the desire of both to kill the independent tax regimes of Ireland, Luxembourg and others who don’t have big native centers of capital to fill their treasuries. A look at the current plans for bailouts of Air France KLM and Lufthansa gives a good idea of where that debate could go.
Markets were nonetheless right to react positively to a truly ground-breaking announcement. Never before have the bloc’s two biggest economies clearly acknowledged the principle of common borrowing to help the region’s weakest regions through grants, rather than loans, in such scale: Coronabonds – although the word obviously didn’t make it into the final text.
That’s a big departure from the tools devised to fight the last economic crisis in the euro zone, which insisted that countries like Greece and Portugal repay all the aid they received.
So – an important first step, but still only that. Until it becomes available – no earlier than 2021, in any realistic time frame – the bloc remains dependent on the effectiveness of ECB policy.
Coming only a week after the Federal Constitutional Court raised a question mark over Germany’s commitment to the ECB’s crisis-fighting tools, the timing could hardly be better.