Head of Macroeconomic Research
Summary: Last week, the president of the EUCO, Charles Michel, unveiled his compromise proposal for the MFF (Multi-Financial Framework) and the recovery plan "Next Generation EU" which is likely to be very close to what the final outcome will be. Ahead of the physical EUCO meeting on July 17 and 18, negotiations at top-level continue with a meeting between Prime Minister Conte and Chancellor Merkel, who holds the rotating EU presidency until the end of the year, in Berlin today.
Council President Michel unveiled its compromise for the recovery plan last week (see here). We believe it is quite close to what the final outcome will be.
Key proposals
Comment
We believe that Michel’s proposal is quite close to what the final outcome will be. There are still points of disagreements (unanimity/qualified majority for the approval of the national recovery plans and rule of law conditionality) but these are not insuperable. It seems that there is already an agreement on the most important aspects of the recovery plan: its size and its composition. This is already a major step forward compared with where we were a few weeks ago. The overall new negotiation box is clearly much better for climate (with the introduction of climate change goals) and for governance of the recovery facility. Hopefully, the concessions made to the Frugals regarding the smaller size of the MFF – which is a mistake if we only think in terms of long-term investment – and rebates will be enough to work out a deal this week. If not, a new extraordinary EUCO meeting might be scheduled within a couple of weeks in order to reach an agreement before the summer break – which is the deadline proposed by Chancellor Merkel. It’s now not so much a question of if but when the agreement is signed. All member states understand quite well that given the magnitude of the crisis they have no right to fail, they are doomed to find a compromise.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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