Deal struck for €750bn recovery fund
July 30, 2020

Deal struck for €750bn recovery fund

Oliver Collin. Fund Manager, European Equities

After four long days of negotiation, EU leaders have agreed a €1.8trillion deal including the €750bn post pandemic recovery fund, of which €390bn grants (the key issue of negotiation) and €360bn loans.

Why does it matter?

  1. Don’t underestimate how hard this deal was to achieve. Over the past four days the EU have shown a strong will to deliver a significant pandemic recovery fund AND iron out a €1.075tn 2021-27 budget framework that also absorbs the loss of UK’s contributions. The need to respond to the COVID crisis appears, if anything, to have eased that issue. That the deal has been achieved in ONLY four days is testament to the will of all parties to take appropriate action and quickly. The biggest pushback from European bears runs something like this “nothing happens and when it does it’s typically too little and too late”: this time at least, Europe, for all its flaws, faults and fissures, has got its act together.
  2. Seeing this as the unequivocal start of full fiscal union would be premature, but it’s significant that the deal allows the European Commission to borrow up to €750bn for the “Next Generation EU” fund on the market. Debt issuance will stop by end 2026 with funding through the EU budget until end 2058.
  3. The Dutch Prime Minister Rutte is right to describe the settlement as a one-off – however, the agreement is also demonstration of fiscal co-ordination at time of crisis and hence sets a precedent for future co-ordination if required. This should count to abating the spike in European assets’ cost of equity both now and in the future. Europe isn’t clamouring left, right and centre to break-up: this deal reflects exactly the opposite.
  4. Money will be deployed quickly with 70% of Grants in 2021 and 2022 with the balance 2023. The deal will both contain the noisy anti-European rhetoric of populists, but also be used as a carrot for further economic reforms where required. The Netherlands and the other ‘frugal’ countries pushed for an Emergency Break which has become a review by Ecofin to ensure plans confirm with the EU targets of Green Policy, Digitalisation and EU Recommendations. Quite rightly then, this isn’t a free lunch for member states whose acceptance of reform and better governance hasn’t always been speedy.

The Covid-19 pandemic is, at the core, a health crisis vs a financial crisis, meaning Europe is better equipped to react. Through its construct, the EU is about people. After the disasters of the 20th century, the EU’s fundamental values are respect for human dignity and human rights, freedom, democracy, equality and rule of law. These principles, presumably combined with learnings from the delayed response to the Global Financial Crisis in 2008, means Europe has, thus far, led the world in containing the pandemic from a healthcare perspective and has shown every sign of being as able as anywhere else to keep up from an economic perspective.

It shouldn’t come as a surprise that the recovery plan has Green Agenda and Digitalisation at the core; both are vital to the long-term prosperity of the region. As the ESG agenda continues to penetrate all corners of the globe, we’d expect to see European companies exporting Green technologies. Likewise, European companies are well positioned as equality and social responsibility gain traction in the wake of the health scare.

That a deal was coming was a ‘known known’ for the markets. That it has been hammered out was to be expected, but given markets’ usual cynicism about most thing European, it is also a relief. It certainly undermines some investors’ view that Europe isn’t properly investable.

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