Odd Lots Podcast Summary: "We Just Saw Europe's Biggest Week in Decades"

Release Date: March 7, 2025

Hosts: Joe Weisenthal and Tracy Alloway
Guest: George Seravelos, Head of FX Research at Deutsche Bank

Introduction

In the March 7, 2025 episode of Bloomberg's "Odd Lots," hosts Joe Weisenthal and Tracy Alloway delved into a transformative week for Europe's financial and economic landscape. With soaring bond yields, a robust stock market, and significant fiscal policy shifts, Europe appears to be experiencing its most substantial economic surge in decades. The episode featured an in-depth conversation with George Seravelos from Deutsche Bank, who provided expert insights into these developments.

Europe's Economic Surge

Rising Bond Yields and Stock Market Performance

The episode kicked off with Joe and Tracy discussing the remarkable performance of European financial instruments. They noted that the German 10-year Bund yield had surged from approximately 2% in early December to nearly 2.9% by early March, marking the largest one-day movement since the Berlin era.

Joe Weisenthal [04:13]: "Yesterday's move was the largest one day move since basically around the time the Berlin."

Additionally, the DAX index exhibited significant upward momentum, reflecting a broader positive sentiment across European financial markets.

Strengthening Euro and Sectoral Growth

Tracy highlighted the strengthening of the euro against the dollar and the impressive performance of European defense and financial stocks.

Tracy Alloway [04:29]: "European financials doing really well too. It's like, you know, everyone was so down on everything Europe. And then Trump was expected to make those lines go down further and they've just been rocketing up."

Despite initial pessimism regarding Europe's economic prospects, the markets have rebounded strongly, suggesting renewed investor confidence.

Fiscal Policy Shifts in Europe

Germany's Bold Fiscal Expansion

A central theme of the episode was Europe's substantial shift in fiscal policy, particularly Germany's unprecedented move towards fiscal expansion. George Seravelos outlined the magnitude and speed of these changes, comparing them to historical benchmarks.

George Seravelos [07:45]: "I would say it's both the size and the speed that's taken markets by surprise."

Germany is channeling funds into a 500 billion euro infrastructure initiative and reforming the "Schuldenbremse" (debt brake) to allow increased borrowing for defense and other critical sectors. These measures are projected to elevate Germany's fiscal deficit from 2.5% to between 5.5% and 6%, approaching U.S. levels.

Comparison to German Reunification

Seravelos drew parallels between the current fiscal expansion and the financial strategies employed during German reunification, highlighting that the current measures might even surpass those historical efforts in scale and duration.

George Seravelos [10:56]: "This was when the eastern Deutsche mark and the western deutsche mark were equated one for one. It was effectively a fiscal transfer to eastern Germany... Now we're talking here 6% deficits, but for many more years."

Implications for Long-Term Fiscal Health

The sustained increase in deficits signals a long-term commitment to infrastructure and defense, potentially reshaping Europe's economic trajectory and fostering growth in new industrial sectors.

Impact on Currency and Financial Markets

Euro's Trajectory Amid Fiscal Policies

The robust fiscal measures have positively impacted the euro, which has strengthened against the dollar. However, the exchange rate remains below pre-election levels, indicating room for further appreciation.

Joe Weisenthal [14:01]: "We've seen this big spike in the euro over the last couple of days... it's still below pre-election levels. Could this dramatically change the trajectory over the coming months and years of the exchange rate?"

U.S. Dollar and Treasury Dynamics

Seravelos addressed concerns regarding the U.S. dollar's dominance and the implications for U.S. Treasuries. He pointed out that while Europe has traditionally been a significant buyer of U.S. debt, current geopolitical and economic uncertainties could challenge this dynamic.

George Seravelos [28:34]: "If Europe is improving, but at the same time all of these properties are being undermined... that does put into question the dollar safe haven rule at the core of it."

Reserve Currency Considerations

The episode explored whether the dollar might lose its status as the world's reserve currency amidst these shifts. Seravelos emphasized that the outcome depends on the U.S.'s fiscal policies and the relative performance of Europe.

Geopolitical Implications

Europe's Increased Defense Spending as a Growth Engine

A pivotal discussion centered on Europe's strategic pivot towards defense spending as a catalyst for economic growth. Seravelos highlighted how increased defense budgets could spur technological advancements and industrial growth.

George Seravelos [27:20]: "Defense as a potential true engine of growth with spillovers... Just over the last few days, we've seen negotiations between Italy and Turkey to develop drone technology."

Integration and Cooperation within Europe

The episode emphasized the newfound cohesion within Europe, particularly Germany, in responding to geopolitical pressures. This unity contrasts with past political discord and signals a potential era of enhanced integration.

Tracy Alloway [31:04]: "It is very striking to see people coming together just a month later."

Impact on U.S.-Europe Relations

The hosts and Seravelos discussed how these fiscal and defense shifts in Europe might recalibrate its relationship with the United States, especially in the context of trade policies and mutual defense agreements.

Conclusions

The "Odd Lots" episode underscored a significant transformation in Europe's economic and geopolitical landscape, driven by bold fiscal policies and strategic defense investments. These developments not only bolster Europe's financial standing but also have far-reaching implications for global currency dynamics and international relations. As Europe strengthens its fiscal position and potentially redefines its role in global affairs, the interplay between European resilience and U.S. policy uncertainties will be critical in shaping the future economic order.

Notable Quotes:

• George Seravelos [07:45]: "It's both the size and the speed that's taken markets by surprise."
• Joe Weisenthal [14:01]: "Could this dramatically change the trajectory over the coming months and years of the exchange rate?"
• George Seravelos [28:34]: "If Europe is improving, but at the same time all of these properties are being undermined... that does put into question the dollar safe haven rule at the core of it."
• Tracy Alloway [31:04]: "It is very striking to see people coming together just a month later."

This comprehensive summary encapsulates the key discussions, insights, and conclusions from the "Odd Lots" episode, providing a clear and engaging overview for those who haven't listened to the full podcast.