If markets participants needed another reason to be optimistic about the prospects for a recovery, they got it on Wednesday as details emerged around the recovery fund initially floated by Angela Merkel and Emmanuel Macron early last week.
The total for the fiscal package is €750 billion (the same size as the initial envelope for the ECB’s pandemic purchase program, incidentally). €500 billion will be in grants, and €250 billion in loans.
It’s notable (to say the least) that the grants portion came in at €500 billion. There was considerable opposition on that front from the “frugal” nations, but it appears Merkel and Macron impressed upon everyone the necessity of getting this done in a way that convinces the market it won’t ultimately be remembered as yet another example of a failed effort at fiscal unity. European equities advanced for a third day on the news.
Bund futures fell and BTP futures rallied. The EU Commission will propose issuing €500 billion in joint debt to finance the fund. Total borrowing could reach €750 billion. These would be, in effect, “coronabonds” and they would be a giant step down the road towards a fiscal union and burden-sharing.
Italy will reportedly get €81.8 billion in grants under the fund. Spain would be allocated €77.3 billion. Greece’s allocation would be €22.5 billion. France would receive €39 billion.
Additional details include guarantees from the EU budget for “temporary” equity support to solvent companies and capital for infrastructure and healthcare investments.
All 27 EU members would have to back the plan. From a political perspective, this would likely be a long-term negative for the populist wave which swept the bloc starting in early 2015.
Austria, Denmark, the Netherlands and Sweden, pushed back on the Franco-German proposal, and it remains to be seen whether they’ve truly been brought around.
10-year Italian yields fell to 1.5%, the lowest since April 7. EURCHF jumped to the highest since early March. “The jump in the pair shows just how much the lack of a coordinated joint approach to the pandemic was driving haven flows into the franc”, Bloomberg’s Richard Jones wrote.
The deal is far from sealed, but it would be fair to say that this is the closest Europe has ever come to taking a serious step down the road towards a shared fiscal destiny and it will be welcome news for markets even if the initial knee-jerk reactions are eventually faded.
Reports over the past several days indicated Merkel saw the recent German court decision as a possible check on the ECB’s capacity to keep the euro intact. That may have helped motivate her decision to back Macron in the push for a jointly-guaranteed recovery fund.
Skeptics will abound, but as Bloomberg’s Ven Ram put it in a short note, this is “perhaps the largest political shift on the continent in 30 years”.
