Capital markets bankers and their trading and trading colleagues marveled on Tuesday morning at the narrowing spread between Italian government bonds and their German counterparts, the possibility of a new jumbo bond program by the European Union to finance its response to the Russian invasion of Ukraine.
The spread between BTPs and Bunds narrowed by 13 basis points as it emerged EU leaders were discussing plans that could involve issuing up to 100 billion euros this year to fund defense and renewable energy, as the bloc struggles to wean itself off its dangerous dependence on Russia for energy supplies. .
Some were surprised by the tightening, believing that the threat posed by Russia (in addition to the still likely withdrawal of quantitative easing) should lead to European periphery credit spreads widening rather than narrowing, particularly those of Italy, a particularly large consumer of Russian gas.
But the market seemed to welcome a plan that seemed to reduce Italy’s exposure, or at least help it bear the brunt. The REPowerEU programme, on which more details were announced later today, is supposed to eventually free the EU from this problem.
In fact, investors may perceive exactly what REPowerEU and the defense plans represent – another important step towards a United States of Europe, in the same way as the responses to the sovereign debt crisis ago 10 years and the pandemic more recently have resulted in more political and economic cohesion than would have been possible without the financial and social emergencies.
It is the countries of the periphery that have the most to gain from these moments of transformation which, history shows us, end up bringing greater political and economic cohesion. Spanish bonds tightened 8 basis points against the Bund, showing that it was not just Italy.
The speed of action also impressed – a result, perhaps, of the fact that EU leaders are now well trained to deal with threats quickly, including having the financial tools and levers in place to move on action (SURE, Next Generation EU, macro-financial aid, quantitative easing, etc.).
There is of course a double irony here. We’re one step closer to the United States of Europe thanks to the man trying to tear them apart.
And despite Europe being weakened by the UK’s exit, a combined EU defense force now seems much easier to create and implement.