EU: A Delayed Recovery Fund Deal

Published on October 29, 2020
SGH Insight
** Our understanding is that a comprehensive deal could finally fall into place by next week or the week after, with Poland and Hungary appearing to move close to acceptance of some form of the “rule-of-law” conditionality they have to date opposed for the 750 billion euro Recovery Fund that was referenced multiple times today by European Central Bank President Christine Lagarde under its formal moniker of the “Recovery and Resilience Facility.”

** The European Parliament and EU governments are also approaching a compromise deal on 39 billion euros in additional spending that is being demanded by parliament, possibly allocating around 10 billion euros to their proposed projects now, with an agreement to redirect money from future fines and other assorted EU revenue sources for the balance.
Market Validation
(Bloomberg 11/10/20)

EU Clears Hurdle to Unlock 1.8 Trillion-Euro Budget, Stimulus

European Union negotiators reached a deal on the bloc’s long-term spending plans, moving a step closer to finalizing its landmark 1.8 trillion-euro ($2 trillion) budget and stimulus accord.

The EU is under pressure to wrap up the emergency package so that it will be operational next year, as the continent contends with a surge in coronavirus cases and the worst recession in its history. The recovery plan is expected to add 2% to the EU’s economic output in the coming years, according to European Commission projections.

*GERMAN BONDS EXTEND DECLINE, 10Y YIELDS RISE 3BPS
*EUR/USD TURNS POSITIVE AFTER EU BUDGET NEWS

The alarming surge in Covid infection rates across Europe is putting renewed pressure on the European Parliament and European Union governments to finalize negotiations that have been limping along since July over a 1.8 trillion-euro, combined seven year budget and three year stimulus package, as the EU economy suffers under newly imposed restrictions.

** Our understanding is that a comprehensive deal could finally fall into place by next week or the week after, with Poland and Hungary appearing to move close to acceptance of some form of the “rule-of-law” conditionality they have to date opposed for the 750 billion euro Recovery Fund that was referenced multiple times today by European Central Bank President Christine Lagarde under its formal moniker of the “Recovery and Resilience Facility.”

** The European Parliament and EU governments are also approaching a compromise deal on 39 billion euros in additional spending that is being demanded by parliament, possibly allocating around 10 billion euros to their proposed projects now, with an agreement to redirect money from future fines and other assorted EU revenue sources for the balance.

** The bad news, however, is that a final agreement will come far too late now for the full package to be ratified by the European Union’s national parliaments by the original target date of January 1, 2021. Indeed, sources expect at this point that the launch of the Recovery Fund will be delayed by as much as two to three months into 2021.

** Truth be told, while markets may have already priced in the additional stimulus, the recovery funds were not supposed to start flowing until mid-2021 anyway, and so sources in Brussels are downplaying the impact of this delay.  Looking through the fine print, the package is constructed in such a way that governments can receive only 10% of the promised grants up front in “pre-financing.”

** Furthermore, the vast bulk of the money is to be paid out only when projects reach agreed targets and milestones, and only after these are ratified by EU finance ministers, to be spread out over the next three years. To be precise, governments will be given until the end of April 2021 to submit project proposals, and the European Commission will have two months then to evaluate them.

As in 2020, the vast bulk of fiscal stimulus in 2021 will therefore be coming not from pan-EU sources, but from national government budgets, and these, as noted by President Lagarde, are in some cases already looking to be expanded.

 

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