The ECB’s Strategic Review in 2020 may (slightly) change the inflation target

The banking industry in Europe is entering the corona recession with strong capital levels and ample liquidity, though still only moderate profitability. Revenues will come under substantial pressure this year, loan loss provisions will jump and net income will fall materially – many banks may well make losses. However, there is likewise massive support from the public sector, with governments propping up the real economy, central banks the financial markets and supervisors relaxing rules for banks. This should mitigate the hit. Nevertheless, the risks are profound and a prolonged shutdown could even trigger a renewed banking crisis. Enormous uncertainty regarding its depth and length notwithstanding, the current crisis may well turn out more severe than the macro-financial shock scenario underlying the latest European bank stress test. Its magnitude could possibly even exceed the financial crisis and the Great Recession. [more]

The corona pandemic and the related travel restrictions and lockdowns have caused both domestic and cross-border travel to collapse. All types of transport are affected. If the lockdowns remain in place over the summer months, traditional tourist destinations, for example on the Mediterranean, will suffer major economic losses. [more]

In their fight against the spread of COVID-19 over the last weeks, EU governments introduced temporary restrictions to border traffic of various degrees ranging from border controls to outright closure. In several cases this had a severe impact on freight traffic as border controls led to tens of kilometres of traffic jam, such as between Poland and Germany. [more]

The competition for global AI leadership is speeding up. But it already seems to be a two-horse race between the US and China. Europe faces an imminent risk of falling far behind if the EU and its members do not react rapidly and boldly. This could have broad implications for Europe's competitiveness, future wealth and political stability. The Commission's recently published White Paper on AI and its communication on a European strategy for data are crucial steps to formalise the debate on addressing the AI challenge in Europe. While the EU's strategy goes in the right direction, several points need to be clarified, in particular regarding the investment gap towards the US and China, finding the right balance between regulation and competitiveness of the EU's AI industry, and data access for AI research. [more]

In addition to absorbing a virus shock through the China export demand and supply chain channels, Europe now has to absorb a domestic outbreak. Voluntary steps to prevent the spread of the coronavirus (“social distancing”) as well as official containment measures are likely to disrupt economic activity. We expect disruption beyond northern Italy, an area which accounts for about 5% of euro area GDP. A temporary economic shock similar in scale to Hong Kong’s when SARS struck in 2003 would only need to occur in 10% of the euro area for area-wide GDP to stagnate in H1 and take the zone to the verge of technical recession. It is a highly fluid situation, but this might be a best case outcome. [more]

Last week's special Council meeting on the next EU budget 2021-2027 ended without an agreement. When EU leaders left Brussels on Friday after close to 30 hours of negotiations, there was no timeline set for further talks. In our view, it would have been a surprise if the meeting had led to a big breakthrough, given the traditionally contested nature of negotiations between net contributors and recipients of the seven-year budget. This time, the situation is much more complicated, as Brexit leaves a sizeable gap of around EUR 60-75bn in the ~EUR 1tr budget. Still, despite the meticulous preparations of Council President Charles Michel, including a marathon of bilateral meetings with EU leaders ahead of the summit and a new compromise budget proposal, not even a preliminary agreement regarding the approximate size of the Multiannual Financial Framework (MFF) could be reached. [more]

Brexit talks are only moving onto the next phase, the UK and EU must agree the terms of a future economic relationship by the end of the status quo transition period on December 31st 2020. The next chapter in talks is expectant to generate less in the way of intraday excitement for investors, their outcome is more important for the UK's future growth prospects and asset valuations. [more]

European banks continue to strive to not fall further behind. Revenues and costs in the first three quarters of 2019 were flat compared to their levels a year ago. Remarkably, interest income rose despite even lower interest rates. Loan loss provisions edged up from record lows. Net profits fell moderately but remained solid. Balance sheet growth was the strongest in years as banks fight to hold their ground against an array of new competitors. Along with the struggle to improve revenues, 2020 may be shaped by Basel IV implementation, continuing geopolitical risk and a fragile macroeconomy. [more]

With their „European Green Deal“, the European Commission expressed an admirable ambition to be climate-neutral by 2050. Are such ambitious long-term goals good for the credibility of European climate protection policies? Especially when they include only the vaguest notions of how to get there, and when the measures for more efficient climate protection that can be implemented in the short-to-medium term are not making sufficient progress? I don’t think so. [more]

Improved performance in the second quarter has given European banks hope that 2019 may still end on a more conciliatory note and that longer-term prospects are not quite as gloomy as some fear. In H1, net interest income rose year-over-year, despite unrelenting margin pressure. Other revenue components were mixed, with fee and commission income disappointing again. Loans and total assets in general increased. Banks cut expenses further, while loan loss provisions picked up from record lows. In the end, profitability and capital levels remained largely stable. Once more, the transatlantic gulf in performance widened slightly, as US banks reported another rise in net income to a new all-time high. [more]

The government will hold a Queen's Speech - an outline of the government's legislative agenda. The votes on the Queen's Speech will be held on the 21st and 22nd October, with amendments possible only on these days. Under this schedule, the UK Parliament has just under a week in early September followed by just over a week in late October to prevent a no deal outcome. In practical terms, this schedule limits the ability of MPs to take a legislative route to block a no deal Brexit. [more]

The digital transformation has enriched societal discourse through new forms of multilateral communication, but it has also amplified the spread of misinformation, echo chambers and propaganda, offering authoritarian states new means of surveillance and control. How democracies approach this challenge will be a key factor in their performance, given intensifying competition among political systems. [more]