For more than a decade, investors have questioned the durability of the European project. The landmark EU budget deal reached by the European Council on July 21 should put an end to that. We have reached the climax of Euroscepticism. 

The European Recovery Fund, a €750bn fiscal package, may not be massive in but it’s “massive in intent,” said Nikhil Srinivasan, in his role as CIO at PartnerRe in London. “It has taken away essentially all European breakup risk and represents a concrete move in the direction of fiscal union.” 

For the first time in its history, the EU will borrow from capital markets to finance expenditures throughout the Union. The Germans finally relented because the “dirty secret” is that the cost of debt is zero. 

“If you issue 30-year euro bonds, how much are you paying for that? Nothing!” Srinivasan proposed. “What matters is the refinancing cost at some point 30 years in the future. That’s for the next generation to deal with and that makes it much more palatable.”

He is very bullish on the euro. Stronger fiscal support, greater EU solidarity and integration, potential banking union, US rates converging to the ECB’s, portfolio flows diversifying away from the dollar, and rebalancing of reserve holdings means a stronger euro over a multi-year time frame.Investors may become more comfortable holding European assets as the EU becomes a major borrower.

“There’s no reason why we can’t get back to 1.30 at a minimum, when Greece was the main concern for the continent,” said Srinivasan. “Any correction is a reason to buy more euros.” 

Europe, an amalgam of countries which, by default, is dominated by Germany, will always do less politically and monetarily than the US which should benefit the currency. With a more developed social safety net and less wealth inequality, Europe doesn’t need to spend as much as the US to correct societal imbalances. 

Asked if his bullishness extended to European equities, which have a higher weighting in cyclical stocks, Srinivasan said he is “more convinced” about the euro. European stocks are at 100-year lows versus US stocks and remain cheap versus their global peers, but it’s been a fool’s errand to bet on mean reversion. 

Another participant noted that we could start to see risk premia compress across European assets. European banks, senior subordinated debt, CoCo bonds could all do well.