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No Final Answers Yet On The EU Recovery And Resilience Facility

Market movers today

The EU Council summit ended yesterday without any final answers on the EU’s response to the current economic crisis (as expected). However, this morning, Bloomberg reported that the frugal countries stand ready to accept EUR390bn being made available as grants, allowing a possible deal this week.

The COVID-19 situation in the US continues to worsen and the number of new cases in California accelerated over the weekend causing the mayor of Los Angeles to warn that the city might be heading towards another stay-at-home order.

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There are few economic indicators this week, although we will get flash PMIs on Friday. However, PMIs have proven difficult to interpret lately due to various technical factors as well as the fast-moving economic environment.

Selected market news

The weekend was dominated by the EU Council summit in Brussels, where the 27 EU heads of state/government discussed the Multiannual Financial Framework for the years 2021-27 (the budget of the EU) as well as the EU Council’s proposed response to the current economic crisis. The latter consists primarily of the Recovery and Resilience Facility (RRF). At EUR560bn, this makes up the largest share of the ‘Next Generation EU’ (a temporary reinforcement of the EU budget for the years 2021-24) totalling EUR750bn, with funding stemming from EU bond issuance in three- to 30-year maturities with repayments in 2028 to 2058. The sticking point of the negotiations revolves around the share of loans vs. grants and what requirements should/can be attached to any funds paid out. The initial proposal saw the share of grants at EUR500bn out of the total EUR750bn but over the weekend this was gradually watered down and, on Sunday, EU Council president Charles Michel put forward a proposal for EUR400bn of grants. Bloomberg reported this morning that the Nordic member states and part of the ‘frugal countries’ (Denmark, Finland and Sweden) were not opposed to this number but that the Netherlands and Austria had set a hard target of EUR350bn. Regarding the requirements, before the meeting these were largely expected to come from an economic reform standpoint, but the weekend added yet another layer as several countries, including the ‘frugal countries’, want the EU budget to be directly linked to the so-called ‘rule of law’ principle. This means that funds paid out to member states from the EU budget could be withheld if the principle is not observed. This has been met with resistance from both Poland and Hungary.

An agreement on either the budget or the RRF was not expected this weekend, with both Dutch Prime Minister Mark Rutte and German Chancellor Angela Merkel downplaying any chances of success last week ahead of the meeting. This also means that the lack of an agreement so far probably won’t move markets much today. Instead, investors’ focus will be on the share of grants to be included eventually in the agreement. The EUR is unchanged versus most major currencies this morning. If an agreement is not reached this week, we would still expect it to be reached before the European Commission starts its holiday in August.