EU summit to leave important questions unanswered – ABN Amro

FXStreet reports  that the European Council comes together this Friday and Saturday to discuss the Multiannual Financial Framework (MFF) 2021-2027 and the Recovery Fund. Many member states still criticize the current shape of the Recovery Fund. Economists at ABN Amro expect the EU-summit to result in a shared communiqué including total size of the fund and proportion loans versus grants, but to leave some important questions unanswered.

“We expect the size of the Recovery Fund to remain EUR 750 billion, as a significant reduction would send a signal that Europe is unable to put in place sufficient firepower given the size of the shock. Furthermore, due to continued criticism from the Frugal Four and Finland that the proportion of grants under the current proposal is disproportionally large, we expect the split between loans versus grants to become more even.”

“The compromise proposal from European Council president Charles Michel indeed suggests allocating part of the funds based on the Covid-19 related economic shock, proving that those criticisms have been heard. We think a group of member states will push for more funds to be allocated on the basis of such a key. Finally, we expect criticism from the northern states to result in reduced transfers to the south.”

“Firstly, we expect country spreads versus Germany to widen on the back of signs that the Recovery Fund will be watered down, with most significant impact across the periphery. Secondly, a revised allocation key will see winners and losers compared to the EC proposal, with Irish and French bonds outperforming and Portuguese and Italian bonds underperforming versus peers. Thirdly, we expect extended uncertainty on the exact shape of the Recovery Fund to result in increased spread volatility over the coming months.”