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EUR Risk Ahead: EU27 Leaders Meet Tomorrow for EU Recovery Fund Discussions



EUR has traded on the back foot in recent days, a reflection of a fading of optimism for EU27 leaders to make a deal on the EU recovery fund at tomorrow’s EU Council Summit meeting.


What is being discussed?


EU27 leaders are discussing proposals for a big fiscal stimulus package to address the impact of the Covid-19 crisis called the EU Recovery Fund, which will come alongside the EU’s 2021-2027 budget, which is also still under discussion.


Various proposals for the Recovery Fund have been put forward, the two that have seemingly gained the most traction, however, are the Franco-German and European Commission proposals.


The former creates a EUR 500bln fund, which gives out grants, funded by jointly issued EU debt. The latter goes further, proposing a EUR 750bln fund, with EUR 500bln in grants and EUR 250bln in loans, also funded by jointly issued EU debt.


The fact that all EU nations have accepted the notion that the EU will need to issue joint EU debt is seen as a big step in the right direction, and is a major factor that has underpinned EUR gains over the past month or so.



How have discussions gone thus far?


This week, discussions appear to have lost some momentum, after those initial big steps in the right direction when all the proposals were being released. Various EU officials have indicated that the EU is still some way off being in agreement;


European Council President Michel yesterday said he thinks that EU governments are far apart on a recovery plan and that a deal will take weeks.


Moreover, Italian PM Conte also said yesterday that the positions of member States on the EU Recovery Fund were still far apart ahead of this week’s European summit.


Finally, German Chancellor Merkel has said that she does not expect a final decision on EU Finances at tomorrow's European Council Summit, just an exchange of views.


Low expectations for tomorrow’s meeting


Given the lack of optimism shown by officials heading into tomorrow’s meeting, expectations for any major breakthroughs are low.


However, Germany (the EU’s most influential member), does appear to be attempting to push things forward quickly; Chancellor Merkel called for an agreement before the Summer break (i.e. by the end of this month).


Moreover, today a Senior German Government official said that Germany that prepared to make a special solidarity contribution given difficult circumstances in EU.


With Merkel keen to get a deal within the next two weeks, could the German’s be about to attempt to sweeten the deal a little to push negotiations along?


Given how low expectations are for tomorrow’s meeting, any signs of progress would be taken as a EUR positive. A lot depends on what that Senior German Government official meant by saying “Germany is prepared to make a special solidarity contribution”. If that means a decent sized lump-sum transfer of funds to other parts of the EU from Germany, this could be an offer that other EU leaders would find difficult to refuse. 

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