A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Super Mario’s Next Challenge
Share this story:
Andrew Kositkun Senior FX Advisor
The EU Recovery Fund was a landmark initiative for EU integration even if it fell well short of being a Hamiltonian breakthrough. This is, in part, due to the fact that the implications of the EU Recovery Fund go beyond economics.
As an example, the overwhelming parliamentary endorsement Mario Draghi’s administration, including broad support from former Eurosceptic parties, likely would not have happened without the 210 billion euros in resources made available to Italy through the EU Recovery Fund.
Italy has always been the elephant in the room during discussions on the viability of the euro project. A key part of Draghi’s program will be his reform efforts that focus on improving the efficiency of the judicial system, reforming the tax system and streamlining a cumbersome bureaucracy that tends to lead to over-regulation — all areas identified by the European Commission in need of reform.
Moreover, Draghi has underscored the importance of EU Recovery Fund resources for Italy but has highlighted the difference between good debt linked to targeted, productivity-enhancing spending versus bad debt as a result of scattered policy measures. Notably, the new EU Recovery Fund means that reform is motivated by the carrot rather than the stick, as access to grants are dependent on the delivery of reform proposals and subsequent realization of those plans. As such, the success or failure of the Draghi administration will have ramifications beyond the Italian borders.
It is too early to say whether the Draghi government will be able to deliver on the reform front, but an approach based on clear incentives — reforms in exchange for fiscal support — is more promising than the prior mix of austerity and market pressure. In its current form, the EU Recovery Fund is not set to be permanent. But the fund will create a large-scale market for EU-issued bonds. Given the extent of the policymaking infrastructure created by the fund, it won’t be a great leap to see part of the Recovery Fund’s infrastructure become permanent. This includes the possibility for a larger EU budget that includes more direct tax-raising powers to be able to support countries in recession.
But for this to happen, northern countries have to see evidence that fiscal transfers are leading to growth-enhancing changes in the southern economies, with the Italian economy a particular point of focus.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend