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Euro Area predicted to outperforming peers in 2021

August 4, 2020 By Mircea Vasiu

A recent survey led by Goldman Sachs shows an interesting fact about the Euro area economic performance for 2020. While the consensus is that the Euro area’s GDP will be smaller than the Chinese or the United Kingdom’s one in 2021, Goldman Sachs sees things differently.

The U.S. investment bank sees the Eurozone economy as the fastest one to grow , more than any other  major region in 2021. It is generally viewed that the European’s have handled the coronavirus crisis better than the U.S. for instance.

However, while Goldman may be right until 2021 the Euro area needs to find a way to get past 2020. Data coming out lately out of the Euro zone is simply terrible.

Weakening European Data and Spiking COVID-19 Cases

Recent weeks have brought a reality check over the enthusiasm generated by the EU Summit historic recovery fund deal. Euro investors celebrated by sending the EURUSD to over 1.19 – but other Euro pairs did not follow suit (e.g. EURGBP, EURAUD).

As data for July starts to be released,  the number of COVID-19 cases continues to rise. Europe, and in particular Southern Europe, has traditionally made the most of its GDP during the summer month. Tourism is key for countries like Spain and Italy. But also for big metropolitan cities like Paris or Madrid. In fact, the start of the summer season has led to a surge in COVID-19 cases all over the continent – in particular in Southern Europe.

Spain, for instance, announced that the number of tourists in June dropped by 97% when compared to last year. Moreover, last Friday’s GDP data shows a decline of over 18% QoQ for the Spanish economy – and the third quarter’s forecast looks the same.

Furthermore, Spanish banks declined on the stock market recently, posting multi-year lows. Santander, the iconic Spanish bank, reported its first quarterly loss in over 150 years of existence. BBVA and other banks suffered similar losses, with investors pulling out funds from Spanish investments.

This week the Spanish government announced that it will be the first country to tap the coronavirus assistance funds from the EU. Tens of billions of Euros are needed to pay the ERTE (i.e., local unemployment benefits) until the end of the year, signaling the need for cash in Madrid.

But Spain is not alone in this game. Italy, Portugal, suffer from similar conditions. Money from the North will only be a temporary solution. The real question is – what to do with huge unemployment when government assistance ends? Or – will it end anytime soon?

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