Bazookas Galore, Irrelevant Court Rulings, And What’s Next After Europe’s ‘Essential Day’

“This is Europe’s moment. Our willingness to act must live up to the challenges we are all facing”, European Commission President Ursula von der Leyen declared on Wednesday, in a press release unveiling the details of a planned recovery fund for virus-ravaged Europe.

The name of the plan: “Next Generation EU”.

Von der Leyen called it “an ambitious answer”, and you’d be hard pressed to argue with her. As noted when the details first leaked, the total package is worth €750 billion.

Read more: ‘Largest Political Shift On The Continent In 30 Years’ – €750 Billion EU Rescue Fund, Joint Debt To Become Reality

As the EU Commission explains, the vehicle “will raise money by temporarily lifting the own resources ceiling to 2.00% of EU Gross National Income, allowing the Commission to use its strong credit rating to borrow €750 billion on the financial markets”.

We’re talking about joint-debt issuance here, folks. This is a watershed moment. It’s fiscal integration. At long, long last. Of course, everyone will have to agree to the plan, which is not a foregone conclusion. Negotiations will likely drag on for months.

“This additional funding will be channelled through EU programmes and repaid over a long period of time throughout future EU budgets — not before 2028 and not after 2058”, the Commission goes on to say.

“The European Commission’s plans for a recovery fund do not lack ambition”, ING writes, in a quick take, adding that the EU plan to repay includes “raising own resources through taxing large corporates, emission trading schemes and a carbon border adjustment mechanism”.

You can read the details in the document embedded below.

The specific breakdown of the funding is somewhat tedious, but the headliner is obviously the €560 billion for the Recovery and Resilience Facility. The grant capacity is €310 billion, with the remaining €250 billion available for loans.

The figure shows how most of the €750 billion will theoretically be allocated.

The plan will be debated at next month’s summit, but few expect an agreement anytime soon, apparently.

Angela Merkel said negotiations will be “tough” and “will not be concluded at the next EU Council”. “The goal should be to have enough time in the autumn for national parliaments and for the European Parliament to examine things so it can all go into effect on January 1, 2021”, she told reporters in Berlin.

Emmanuel Macron called Wednesday an “essential day” for Europe. “We must go quickly and adopt this ambitious agreement with all our European partners”, he said.

An agreement can’t come soon enough for Christine Lagarde and the ECB, that’s for sure. During an online Q&A Wednesday, Lagarde said the economic slump is now skewed towards the worst-case outcome. “We’ll have a better sense in a few days as we publish our numbers in early June, but it’s likely we will be in-between the medium and severe scenarios”, she said.

It’s now widely expected that the ECB will expand its pandemic purchase program beyond the initial €750 billion envelope.

In comments to the FT this week, Germany’s Isabel Schnabel essentially said the decision from the high court in her own country doesn’t apply to the institution which she joined this year. “We are not adjusting our monetary policy in any way in response to [the German court] ruling”, she remarked. “[It] does not directly affect us”.

This is yet another teaching moment for market participants. The fact is, you have to consider things as they are, not as you think they should be. When the German constitutional court ruling came down earlier this month, hard money types applauded it and some suggested it was a game-changer. I suggested the ECB would simply ignore it.

And ignore it they have and likely will. Just ask Schnabel, who the FT reminds you “oversees bond-buying as head of the ECB’s market operations”.

“We have to continue to act forcefully”, she said. “I’m sure there is going to be communication between the Bundesbank and the German parliament and the German government, and one will have to find a solution. If the ECB can be constructive in supporting that process, we will of course do so”.

Get the picture? If not, here it is (literally):

The German ruling doesn’t matter. It’s a fun legal exercise, and it’s a reminder that at least some folks outside of finance-focused social media are concerned about moral hazard, but at the end of the day, the ECB seemingly doesn’t care. The background noise will continue, but that’s all it’s going to be – noise. In the foreground is more bond buying.

And while the ruling didn’t directly relate to the pandemic purchases, and is specific to Germany, the bottom line is just what Schnabel told FT. Namely, “the Bundesbank and the German parliament and the German government” will have to “find a solution” or, more colloquially, they’ll need to work it out between themselves.

“This is another comment… that the ECB will act if needed [and] we believe this raises the probability that the ECB will increase the PEPP at next week’s meeting”, Danske said, in a Wednesday note.

“[Schnabel’s] comments signal that a further expansion of PEPP could be announced as soon as June 4 when the updated staff forecasts will be released”, MUFG wrote today. “At the same time, the comments reveal that the ECB does not see their PEPP as being constrained by the recent German Constitutional Court decision”.

By the end of this year, the ECB will likely have expanded the balance sheet by another €1.5 trillion or so. If politicians can get on the same page with the fiscal package, we’ll get to find out sometime in 2021 whether the central bank intends to monetize the jointly-guaranteed coronabonds.

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7 thoughts on “Bazookas Galore, Irrelevant Court Rulings, And What’s Next After Europe’s ‘Essential Day’

  1. Another dose of Hopium to soothe a jittery Mr. Market. Clever politics on Merkel’s part. Gets to have her Hamiltonian moment knowing full well it will never come to pass in any form close to what has been presented today.

  2. The fact is the USA is no longer a reliable partner. Joint Military budget should come shortly. Germany will re-arm in a real fashion. Germany needs the Euro and some members will balk at being trapped in a debt depression. China is shopping Europe and controlling political spin. Far more than equities afoot.

    1. How would returning to the Mark be a problem for Germany? In fact how wouldn’t abandoning the Euro, which is more a political device, than an economically useful instrument not be economically better for everyone in the long run especially PIGS? As for Germany re-arming that costs money, real money especially if Germany were to suddenly undertake military planning outside the framework of NATO –their entire military infrastructure would have to be uprooted and replaced –not likely in the current economic (and demographic) environment.

      1. “How would returning to the Mark be a problem for Germany?” Errr…. The currency appreciation that would accompany such a move would make Germany’s export industry painfully less competitive overnight. 21 years worth of gradual appreciation would take place in one hit and that is assuming there is no over-shooting.

        1. That’s a fair point but after the initial shock, which I cannot imagine being more consequential than the US pulling out of Bretton Woods or Volcker’s interest rate hikes in the early 80s, there would seem to be an upside –capital flows for instance. On the flipside there would also be near term pain for PIGS, inflation, capital flight, defaults etc. . .but are CB’s chronic emergency measures going to forever stave off what we once thought of as a “Day of Reckoning” –or do we believe that it too can be refinanced just like everything else?

  3. This is another demonstration that timing is everything. The ‘genius’ of the Franco-German proposal is to tie the recovery stimulus to the MFF which is currently negotiated. This ensures that any disagreement will be ironed out before the end of the year. New budget kicks in on 1 January 2021.

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