• Joel

EUR Volatility Ahead: EU27 Meet Tomorrow for Recovery Fund Discussions

EU27 Finance Ministers are set to meet tomorrow, ahead of the European Council get together on June 19th, when leaders of the EU27 will meet. 

At tomorrow’s meeting, markets will be on the lookout to see if the EU27 are able to make any progress in the negotiation of the bloc’s common fiscal response to the Covid-19 pandemic, the EU recovery fund. 

Note: Normally what happens with EU negotiations on fiscal/EU budget matters is that the Finance Ministers hammer most of the actual deal itself, including all the small print, leaving the big decisions and confirmation of the deal to the EU leaders at the next Council Summit. As such, markets are therefore not looking for a deal to be finalised, just for signs of progress. 

The Context

In response to the Covid-19 pandemic, the EU agreed to provide countries with immediate access to a EUR 540bln rescue fund in the form of cheap loans. This scheme has largely been regarded as insufficient to assist the hardest hit nations in their post Covid-19 economic recoveries (such as Italy and Spain) so a new economic package has been under negotiation over the past few weeks. 

EUR sentiment took a huge turn for the better after Germany and France proposed a EUR 500bln recovery package to go alongside the next EU budget, that would be made up of grants and funded through jointly issued EU debt, to take advantage of the EU’s excellent AAA debt rating (in other words, ability to borrow funds cheaply). 

The fact that Germany is on board with joint EU debt was seen by markets as a big step in the right direction, and it now appears that other countries who had previously also opposed joint EU debt are now also onboard with the idea. 

Shortly after the Franco-German proposal, the European Commission made their own, even more ambitious, proposal; a EUR 750bln package, EUR 500bln in grants and EUR 250bln in loans, also funded by joint EU debt. 

However, not everyone is in agreement just yet…

The Sticking Points

Denmark, Austria, Netherlands, and Sweden, also known as “the Frugal Four” alongside Finland, have said that they oppose the European Commission proposal in its current form. 

Their main problems centre around the size of the proposal and the amount that will be given out in the form of grants, not loans. 

Another point of contention is how the money is divided up between recipient nations; what economic measures are to used over what time frames to determine how much each country should receive. 

EUR reaction

EU officials have offered varying prediction on when they think an agreement on this package will be reached by, but the consensus is some time this summer (between the end of June and end of August). 

Therefore, though markets will be somewhat disappointed if no solid progress is made at tomorrow’s meeting, it will be unlikely to trigger a huge EUR sell-off just yet - as negotiations are still in their early stages, as per the guidance from officials. 

On the other hand, if substantial progress is made, this could be a BIG positive for EUR, with EURUSD likely to rally into the 1.14s.



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