EUCO Preview: See you next month! EUCO Preview: See you next month! EUCO Preview: See you next month!

EUCO Preview: See you next month!

Christopher Dembik

Head of Macroeconomic Research

Summary:  On Friday, European leaders are due to meet to discuss the recovery package "Next Generation EU" presented by the EC in addition to the standard seven-year budget for the period 2021-2027. There is still quite some way to go towards an agreement, notably regarding the balance between grants and loans and the criteria for allocating money. An agreement on the recovery plan in July, as expected by Chancellor Angela Merkel, is certainly a very optimistic scenario considering current divisions among member states.

Since the beginning of the outbreak, the EU has implemented radical measures by European standards to cope with the crisis:

  • The three safety nets presented by the Eurogroup and endorsed by the EUCO worth €540bn for workers, businesses and sovereigns has been endorsed and is operational since June 1. It includes the Commission’s unemployment reinsurance scheme (SURE) for €100bn, support to businesses via extra financing through EIB loans, up to €200bn, and the activation of the ESM with soft conditionality attached, capped at €240bn or 2% of member states’ GDP. Contrary to the 2012 design, the new ESM credit line has many benefits such as lower total charge to countries (1% in the old version, versus 0.08% for 10 years or even -0,07% for 7 years in the new version). Initially, Cyprus was expected to be the first EU country to tap ESM credit line, but it quickly backtracked. Similar discussions are currently going on at parliamentary level in Italy, but activation of the ESM does not seem the top option of the governing coalition.
  • The new and temporary “Next Generation EU” instrument for 2021-2024 worth €750bn that will be part of the talks on Friday along with the MFF for the period 2021-27. The first version of the recovery fund proposal by the EC include €440bn grants, €60bn guarantees and €250bn loans. The EU would borrow long-term at very low rate due to the EU’s strong credit rating to finance this instrument. As an example, based on the EC plan, the following countries would receive grants reaching around €83bn for Italy, €77.3bn for Spain, €39bn for France and €22.5bn for Greece. This is not free money. Access to the instrument would require countries to prepare recovery plan as part of their National Reform Programmes that would be assessed in the European Semester process. The Commission, the EUCO and the European Parliament would have total control over the allocation of the funds, though it is still unclear how it would exactly work. We only know that EU funds would be released in instalments depending on progress made on the recovery plan. It is unclear at this stage whether recovery plans would include structural reforms, but it will certainly be part of the political bargaining between the Frugals and the rest of the EU.
  • On the top of these measures, the ECB has also unleashed new monetary stimulus measures as part of its quantitative easing programs, worth a total of €1.6tr.

Issues raised by the EC proposal

When the “Next Generation EU” instrument was first presented by the EC, many overly-optimistic commentators have talked about “Hamilton moment” for the EU. Digging into details, it looks more like a missed opportunity than a real leap forward in European integration. The two major limitations of the proposed scheme are the total amount allocated remain below what the dire economic situation would necessitate, at around 0.9% of EU GDP per year on the period 2021-2024, and it is very ill-timed. Due to the administrative processes, notably approval, the delay of disbursement is extremely long. Less than a quarter of total grants are expected to be spend in the next two and half years with the peak of the stimulus happening in 2023-24, which is way too late for the recovery.

The EC will also have to provide clarifications about exact criteria for allocating money (as mentioned previously). So far, it has only been stated that: “It will be available to all member states but support will be concentrated in parts of the Union most affected and where resilience needs are greatest”. Finally, there is certainly a misunderstanding regarding the EC’s communication concerning new direct EU budget revenues (taxes) that will help the repayment of the EU borrowing for the recovery plan. Since the EU lacks tax sovereignty (Article 311 of the Treaty on the Functioning of the EU), we don’t see how it would be able to raise taxes to cover the cost the Next Generation EU.

No breakthrough in negotiations this week

What is very surprising is that there is little communication from member states ahead of the meeting. This certainly means that negotiations behind closed doors continue at an intensive path at ministry level and that no country wants to jeopardize them. In a way, it is rather a positive signal.

Over the past few weeks, slight divisions appeared between the Four Frugals with Denmark easing its opposition to the EC proposal, and officially joining the “skeptical” camp which includes Hungary. However, it will take quite a lot of time before reaching an agreement and we believe that the soft July deadline mentioned by Chancellor Angela Merkel is unrealistic. We also need to remember that a long parliamentary process regarding Next Generation EU has started or is about to start in many members states that could significantly slowdown the whole process. A few weeks ago, the Finnish Parliament’s constitutional committee, who was the first to examine the EC proposal, has ruled out it may not comply with the EU law – it is not a major roadblock that political will cannot overcome but it is a “stone in the shoe” of the EC and supporters of the recovery package.


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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 (
Full 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 Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


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

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 are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

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

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.