By Geoffrey Smith
Investing.com -- Europe’s economic engine is turning up the revs.
Germany’s DAX index crossed the 12,000 mark for the first time since March on Tuesday amid reports that the government is set to approve a new fiscal stimulus package worth an estimated 80 billion euros.
According to the newspaper Bild am Sonntag, the package is set to include handouts for families with children and possibly the assumption of local government debts by the federal government to create more space for spending on essential services.
However, the most interesting part for investors is that the government is once again set to pour billions into supporting the auto industry, which in recent years has supported well over 14% of all jobs in the country, directly and indirectly.
As a consequence, the big three names are all flying, with Daimler (OTC:DDAIF), the maker of Mercedes-Benz, leading the way: Daimler shares rose 9.5%. They’ve now recouped all the losses suffered since the first week of March, despite the profound long-term uncertainty over the outlook for the car industry that the pandemic has created.
Daimler’s luxury car rival BMW was also purring. BMW stock was up 5.9%, while Volkswagen (DE:VOWG_p) stock was up 6.3%. The DAX itself was up 3.5% by 5:30 AM ET (0930 GMT), while the STOXX 600 was up 1.5%.
The country’s biggest suppliers to the auto industry also breathed a huge sigh of relief: Continental (DE:CONG) stock rose 6.0% and Covestro (DE:1COV) rose 5.9%. Among midcaps, Fuchs Petrolub (DE:FPEG_p) stock gained 18% and Hella (DE:HLE) stock rose 7.8%.
“Without state support, the labor market and companies face a long recession, due to the dramatic consequences of the pandemic,” said Deutsche Bank strategist Ulrich Stephan in a morning note.
In contrast to the Great Recession of 2009, the government had held off from rushing to the auto sector’s help in the pandemic, a consequence of the political damage that the industry did itself with the Dieselgate scandal. The optics of state support for luxury carmakers in particular haven’t been helped either by the fact that both Daimler and BMW are still paying dividends to their shareholders.
Reports suggest that much of the sectoral support will be focused on improving overall environmental performance.
Even so, the main takeaway is that a government which still has the capacity to borrow heavily to ride out a temporary crisis is doing so, having convinced itself that doing less will end up just as expensive in terms of damage to the country’s industrial and human capital. Good news for Germany and good news for Europe, especially the central European economies which have been integrated most tightly into its supply chains.