Thoughts on the Eurogroup videoconference
Head of Macro Analysis
Summary: After 16 hours of unsuccessful negotiations, the Eurogroup is suspended. Italy and the Netherlands are still at loggerheads. The discussion between finance ministers should resume on Thursday again. The press conference that was initially scheduled at 10 AM (Brussels Time) is canceled.
Mario Centeno, president of the Eurogroup: “After 16h of discussions, we came close to a deal but we are not there yet. I suspended the Eurogroup and we will continue tomorrow, on Thursday”.
Olaf Scholz, German finance minister urged countries not to “refuse compromise”.
Wopke Hoekstra, Dutch finance minister: “It is too early to agree on a comprehensive package”.
- Surprisingly, the Eurogroup did not kick coronabonds down the road, so the instrument might still be debated as part of the toolkit in further negotiations.
- On Twitter, the German Finance minister, Olaf Scholz, confirmed that they were close to a draft compromise last night supported by France, Germany and Spain but that was turned down by the Netherlands and Italy.
- Italy asked for explicit mention to coronabonds instead of “innovative financial instrument” in the draft agreement and demanded no conditionality on ESM loans.
- The Netherlands insisted on “phased” conditionality to ESM and ditched any discussion about a post-crisis package to deal with the reconstruction phase.
- The Frugal four (Austria, Finland, Germany and the Netherlands) want assurances the European unemployment scheme (SURE) is temporary.
- The French fund for joint investments and Spain’s Special Purpose Vehicle have apparently not been lengthy discussed and will be left for EU leaders to debate.
The endless game of pandemic ping-pong between Italy and the Netherlands led to a new inconclusive meeting between the finance ministers. As was the case two weeks ago, the sticking points are how to refer to the ESM and a post-pandemic recovery plan. The suspension of the Eurogroup until tomorrow is rather positive as it will allow Germany and France to increase pressure on the Netherlands and Italy in the interim.
We are optimistic about the possibility of a watered-down agreement tomorrow that could include a revised EU multiannual financial framework, higher EIB guarantees (€200bn according to preliminary discussions) and potentially a one-off transfer to countries in need whose amount could be higher than that initially suggested by the Netherlands (between €10-20bn). It is also likely that the European Commission will give the assurance that SURE, based on a loan mechanism, will be temporary. By contrast, the ESM and attached conditionality might remain a stumbling stock.
Regarding the post-pandemic comprehensive, it will certainly be up to EU leaders to discuss it further in the coming weeks or months, depending on the evolution of the health crisis. At some extend, the Netherlands are right to indicate this discussion is a bit premature given that most European countries have not even defined an exit strategy, apart from Austria and Denmark. We still believe that the discussion over coronabonds will comeback when it will be time to talk about the economic reconstruction phase, at the earliest in the summer.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.