Cumberland Advisors Market Commentary – The War in Europe

Author: William Witherell, Ph.D., Post Date: April 3, 2020

During the first quarter of 2020, Europe once again found itself to be in the center of a global war, this time against an invisible, very deadly enemy, the virus SARS-CoV-2, which causes COVID-19.

The War in Europe

At the end of the quarter, on March 31, the 19 countries of the Eurozone had 359,296 confirmed cases of the virus and 26,612 deaths. Adding the remaining 8 member countries of the European Union that do not use the euro as their currency and the United Kingdom, which is in a transition period of leaving the EU, the numbers become 389,151 confirmed cases and 28,267 deaths. These compare with 164,359 confirmed cases and 3,173 deaths in the United States as of March 31. In other words, the EU registered more than double the confirmed cases in the United States by month’s end and about 9 times as many deaths. All countries in Europe are engaged in the battle to varying degrees. Italy and Spain have been hit the hardest. There are some indications that the virus situation in Italy is beginning to stabilize, with contagion appearing to have reached a plateau. The war is still raging in Spain, but the rate of increase in deaths may be slowing.

Governments, after an unfortunate delay, have moved to contain the virus with social distancing, travel restrictions, and lockdowns of increasing severity. Currently, most nonessential businesses as well as schools are closed or operating remotely, and citizens are expected to remain at home except for essential reasons such as to purchase food. A combination of severe supply and demand shocks resulting from both the disease and required countermeasures has led to a sudden recession, the depth and duration of which is impossible to determine at present. It is a service sector-led recession, with the travel and tourism industries being crushed. Keep in mind that services account for over 76% of the gross domestic product of the Eurozone. The just-released final IHS Markit Manufacturing PMI for the Eurozone for March indicates output, new orders, and purchasing in the manufacturing sector all fell sharply. Earlier-released flash data for services showed even steeper declines. Company closures, lockdowns, and rising unemployment are all contributing to the downturn, which promises to worsen in the current quarter.

As is happening in the United States, European governments individually and collectively through the European Union are moving rapidly to provide unprecedented stimulus to the economies and support to affected enterprises and individuals. Tax moratoriums, payment extensions on social charges, loans and loan guarantees, and wage subsidies, along with greatly increased health expenditures, have been announced by governments, with promises of further action (“whatever it takes”). Even Germany, known for the severity of its fiscal restraint in recent years, is abandoning that stance and borrowing 356 billion euros, equal to nearly 10% of gross domestic product, in order to finance its programs to counter the economic effects of the virus. Bruno Le Maire, French finance minister, has indicated that France intends to protect important companies by recapitalizing them and went so far as to say, “I could even use the word nationalization if necessary.”

Collectively through the EU, the European Stability Mechanism, the EU’s economic rescue fund, looks likely to be activated in the coming weeks, and that will provide funds up to another 2% of GDP stimulus from governments and 0.6% of GDP from the European Commission. Furthermore, the European Investment Bank proposes to provide guarantees of up to 200 billion € (About 1.5% of GDP). These measures provide a lot of firepower, and even more may be coming, including an 80- to 100-billion-euro pan-European unemployment reinsurance scheme to help countries faced with rapidly expanding jobless claims.

The European Central Bank has also rapidly ramped up its stimulus actions, including a new Pandemic Emergency Purchase Programme of up to 750 billion euros until the end of this year. This amount is addition to the 120-billion-euro extra purchases announced on March 12. Together these programs will be equal to 7.3% of the Eurozone’s GDP. Most previous restrictions on purchases have been dropped in order to give the ECB needed flexibility across time, asset classes, and jurisdictions. ECP President Christine Lagarde has emphasized, “We are fully prepared to increase the size of our asset-purchase programmes and adjust their composition by as much as necessary and for as long as needed.” She added that the ECB is making available “up to 3 trillion euros in liquidity through our refinancing operations.”

Eurozone equity markets tumbled during the quarter and ended with the iShares MSCI Eurozone ETF, EZU, losing 27.2 % year-to-date as of March 31 on a total-return basis. With fiscal and monetary policy fire hoses turned on full blast, the stage is being set for a potential upturn once the virus threat recedes and investors begin to see some light at the end of the tunnel.

Neither the author nor Cumberland Advisors currently hold the above-mentioned ETF EZU in their portfolios.
Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio

Sources: Financial Times,, Action Economics, HIS Markit, Barclays

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