It’s good politics not to waste a good crisis. When it comes to the 27 members of the European Union, in particular the 19-strong euro zone, rising to the occasion has been a Herculean challenge due to deep-seated differences between the member states, with the more creditworthy northern European countries reluctant to subsidise the heavily indebted southern Europeans. This makes Tuesday’s agreement in Brussels on a €750 billion (US$870 billion) stimulus package to counter the damage wrought by the Covid-19 pandemic – which has claimed the lives of more than 135,000 Europeans and plunged the bloc into its worst recession in memory – all the more significant. Not only was the EU able to overcome the deep animosity between a group of “frugal” countries , led by the Netherlands, and Italy , the economy hardest hit by the virus, it decided to raise jointly issued debt and disburse the money where it is most needed. For the first time since the launch of the single currency in 1999, Europe is moving in the direction of a much-needed common fiscal policy to buttress its shaky monetary union. By crossing the fiscal Rubicon, the EU has demonstrated that it is much more functional than many believed. Just as importantly, it has been able to rekindle a spirit of solidarity, which remains the bloc’s lifeblood. Financial markets have given the deal the thumbs up. On Wednesday, the euro rose to its highest level versus the US dollar since October 2018, while the Dax, Germany’s main stock index, is close to turning positive for the year. More tellingly, the spread between Germany’s and Italy’s 10-year bond yields – a proxy for market confidence in the euro zone – has narrowed to its lowest level in four months. Italy can now borrow money for 10 years at just over 1 per cent, having paid more than 2 per cent in late April. Some investors think the recovery fund is a game changer for European assets. The EU will borrow the money on the capital markets, resulting in a surge in issuance of top-quality European debt that could transform the investment landscape, leading to a reassessment and revaluation of European assets. What’s more, the fact that Germany, traditionally the ringleader of the EU’s frugal countries, joined forces with France to spearhead the recovery plan is symbolically important. History shows that when the EU’s two largest economies jointly throw their weight behind big initiatives, they have the capacity to shift the European debate and move the bloc forward. Yet, market participants should not be carried away by this week’s deal on the pandemic recovery package. First, the agreement comes at a time when Europe was already looking more attractive to many investors because of its success in reopening its economies without a resurgence in Covid-19 cases. This is in stark contrast to the United States , where the virus is spreading rampantly across southern and western states, leading to the reimposition of restrictions and hitting US consumer confidence. In a report published last Sunday, US research firm DataTrek noted that in Berlin, evening and weekend traffic congestion levels show that “consumer leisure activities like shopping and dining out have returned to their pre-Covid patterns”. On the other hand, in the three largest cities in America – New York, Los Angeles and Chicago – traffic levels “are nowhere near 2019 norms”, suggesting that “the US’ slower response to Covid has shifted consumer behaviour more noticeably” than in Europe. Why German court’s challenge to EU is more disturbing than China’s tantrums Viewed through the prism of the pandemic, Europe is in a better place than America, which largely explains the outperformance of European stocks since mid-May. Second, the recovery fund, while a step towards fiscal integration, raises more questions than it answers. For starters, the facility is supposed to be temporary, casting doubt on the commitment to closer integration. Moreover, if one country questions another’s willingness to reform its economy – an inevitability given the distrust between northerners and southerners – the disbursement of aid can be delayed. More worryingly, none of the €390 billion in grants will be dished out until next year, making a mockery of the EU’s emergency response. If even a global crisis as severe as the Covid-19 pandemic is unable to provide impetus for speedier and more meaningful fiscal transfers between European countries, it is difficult to be optimistic about European integration. Third, the perennial problem in the euro zone has been a lack of growth , which partly explains why the bloc’s banking sector has struggled to recover from the 2008 financial crisis. Europe is much more exposed to external shocks than the US. It has also dragged its feet in enacting labour and product market reforms, and lacks the technology behemoths that America possesses. Even if Europe looks more appealing to investors right now because of its relative success in containing the virus and the revival of the Franco-German partnership, big questions persist regarding the bloc’s ability to recover from the pandemic and generate meaningful growth. Donald Trump’s America has failed the Covid-19 stress test. Yet, the EU, and the euro zone in particular, is by no means out of the woods. Nicholas Spiro is a partner at Lauressa Advisory