EUCO: No Hamilton moment but a great telenovela

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  EU leaders have been in Brussels since past Friday for the longest EUCO meeting since that of Nice in December 2000 in order to discuss the new MFF (Multi-Financial Framework) and the EUR750bn recovery fund to cope with the COVID-19. They have not been able to find a compromise yet as the Frugal Four + Finland block progress on the Recovery Plan for Europe. The Summit ended at 6.00 am today (Brussels time) and is expected to resume at 4.00 pm after a well-deserved rest. Despite a lot of acrimony and frustration, there is a strong determination shared by all participants to reach an agreement, but we fear that Michel's ambitious proposal is likely to be watered down significantly, which would mean this is again a missed opportunity for the EU to show real solidarity and move towards the completion of the monetary union.


I think we can all agree this is not Europe’s Hamilton moment, but this is a great telenovela. The best case scenario is that an agreement is reached today or tomorrow.

We see at least three main points of disagreements emerging over:

  • the rule of law (rift between East and West).
  • the volumes of the EU recovery plan and governance (rift between North and South).
  • the EU leadership. This meeting is also about the future balance of power in post-Brexit EU and it seems bright clear that Macron and Merkel’s vigor to push for an ambitious agreement has been bad-perceived by a bunch of member states.

When the EUCO resumes today at 4.00 pm, EU leaders will discuss a new negotiation box covering three main topics:

  • the level of grants: The current negotiation figure is at €390bn, slightly lower than France and Germany’s red line of 400bn, and much lower than the initial EC proposal (€500bn) and past Friday’s draft (€450bn). At some extent, the Frugal Four + Finland’s strategy to consider that supporters of the recovery fund will not jeopardize a deal for a few tens of billions of euros is about to prove to be right. On top of it, it will be interesting to know whether the recovery plan will still be fully financed through EU issuance, which is unclear at this stage.
  • the governance of the fund: The initial proposal was reverse qualified majority voting, which means that a majority is required to block disbursement of the fund, but the Netherlands counter attacked by asking for unanimity. The current compromise on the table is based on qualified majority voting to unlock the funds assorted with minority emergency brake. While not being formally a veto, the minority emergency brake has more or less the same impact as it allows a group of countries (not clear how many countries would be required in the current scheme, it is still up to negotiations) to hijack the process.
  • the rule of law: It might be a new fresh issue that has barely been discussed over the weekend. Hungary, Poland and Slovenia are strongly resisting a system where the disbursement of the funds would be tied to respect for fundamental rights and rule of law. It might slowdown a bit the whole ongoing process, but we don’t think this issue could really derail negotiations.

Comment:

Knowing how the EU is functioning, it was obvious from scratch that Michel’s ambitious proposal would be watered down significantly, but not as much. The deal that will likely be agreed will clearly not be important enough to cope with the magnitude of the crisis. This is a missed opportunity for the EU to create a powerful solidarity instrument based on debt mutualisation that would be macro-significant and that would  constitute at the same time a strategic move towards the completion of the monetary union.  On top of it, it shows how deep is the EU fragmentation and that national interests often prevail, even when only a few tens of billions of euros are at stake. Given the level of acrimony and frustration reached over the past three days, this EUCO will probably have deep long-term consequences on the functioning of the EU and will intensify the rift between North and South. Not saying that this is the first step towards the Netherlands leaving the EU, this is very implausible, but it is certain that trust between member states, based on cooperation in good faith, which is at the very core basis of the European construction, has been broken and it will take a lot of time to rebuild it. This is definitely not what we have been dreaming of…

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.