What is the ECB Recovery Fund?
In May, EU executives put a EUR 750 bn stimulus package proposal to help the EU tackle an 'unprecedented crisis.' The package would be composed of grants and loans issued to every member of the EU.
The president of the EU commission, Mrs. Von Der Leyen said this package would be composed of EUR 500bn in grants and the remaining EUR 250bn in loans.
The ECB would also buy EUR 1.1 trillion bonds jointly issued by EU members to keep borrowing costs down and increase the pool of coveted safe assets.
Why is it needed?
Mainly to provide support across all of the 27-nation EU bloc, ravaged by Covid-19. However, several states across the EU have significant issues with debt even before the crisis, and the virus has only multiplied this, created a desperate scramble for liquidity and money supply for economic support. EU members such as Spain and Italy that have been struck as a result of the virus are keen on leveraging the grants through this proposal to support their respective economies. To give you an idea of the magnitude of this package, Italy may be eligible to receive grants up to 5% of its GDP – that's big.
Without the backing of all 27 EU members, this proposal cannot be enforced. There have been concerns that EU members will not be able to unilaterally agree on this proposal, with individual members such as the Danish foreign minister Jeppe Kofod citing that the current budget plan is 'simply too high.'
German Lawyers highlighted the bond-buying aspect of this as a legal issue where the concern was that the recovery fund would effectively be financing governments, a strategy they say is aimed at placing German taxpayers as a disadvantage and undermining the Euro in the long term. The ECB has been given three months to justify the bond-buying aspect of this program.
How does this affect you?
On the 19th of June, the European Council Summit ended without an agreement on the EU recovery fund (as expected). German Chancellor Angela Merkel has made it clear she wants to act quickly, with next round negotiations scheduled for mid-July. It is anticipated we will know whether this recovery fund will be proceeded with then, else be demolished. An agreement will see a rally to the upside in the Euro whilst a no agreement scenario risks the Euro reversing its upside rally from May onwards.
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