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Efforts to alleviate EU economy in full swing

TOM23.07

After days of acrimonious negotiations, European Union’s leaders, finally, struck a deal on a proposed €750bn recovery package of joint debt to aid member states coronavirus-stricken economies to recover from the ensuing economic disruptions. The agreement, which required unanimous approval from all 27 member states, represents a victory for both German Chancellor Angela Merkel and French President Emmanuel Macron.

Earlier in May, EU’s most prominent leaders had announced that they had joined forces to push a €500bn recovery fund, creating a coordinated European Fiscal response. Rather than issuing loans to national governments, which in-turn would further increase sovereign’s indebtedness, the initial plan was mainly founded on the idea that funds – used to help the hardest hit industries and regions, would be raised through EU-backed bonds and repaid from the EU budget, the majority of which are covered by Germany.

Given that EU’s largest economies shared opposing views over the issue of common debt issuance to pay for recovery efforts, the Franco-German proposal put forward in a joint videoconference in May marked a potentially significant breakthrough. Albeit backed by both the European Central Bank and naturally, by the bloc’s worst hit, the proposal, set to relieve some of the pressure on the ECB, which up until recently, has taken the lead in the EU wide level response, faced resistance.

Attempting to scale back the amount distributed in the form of grants, a ‘frugal’ alliance between the bloc’s northern states, namely; Austria, Denmark, Netherlands, and Sweden proposed a €100bn cut. From €450bn, the ‘frugal’ alliance proposed a sum of €350bn grant coupled with a further €350bn of loans. The proposed offer, which came conditionally on rebates to their EU budget contributions, although backed by Finland, was frowned upon by the bloc’s largest economies, determined to keep grants bound at no less than €400m.

After days of sometimes bitter debate, EU leaders reached a deal.

The recovery package, in-total worth €750bn – higher than the figure initially proposed by the Franco-German alliance, comprising of €390bn in grants and an additional €360bn of low-interest loans, will undoubtedly provide well-needed financial support to the bloc’s worst hit from the pandemic, notably, the southern European countries. In response to reaching an agreement, German Chancellor, with optimism stated; “We have come up with a response to the biggest crisis the EU has faced”.

On the news, sovereign bonds of the recovery package biggest beneficiaries spiked. Upon confirmation that Italy will receive €208.8bn in grants and loans as part of the massive recovery package, Monday and Friday’s market optimism persisted. Notably, yields of Italy’s 10-year sovereign bond, which move inversely to price, fell by a further 4 basis points – to their lowest since early March, extending gains.

Additionally, on the notion of improving market conditions, spreads between the core and peripheral countries tightened, with the spread between Germany and Italy’s 10-year yield narrowing to its lowest level in the past four months.

In our view, although uncertainties remain, the landmark recovery package, agreed between all member states shall indeed bode well for the southern countries – Europe’s worst hit, allowing them to, at least, partially repair the damage incurred to their economies.

Disclaimer: This article was issued by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. For more information visit, https://cc.com.mt/ . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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