Why This Could be the Most Important EU Summit Ever

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Risk markest await EU Summit decision
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Markets were subdued on the last trading day of the week as all eyes were on the EU Summit with investors hopeful that EU officials could work out a compromise on the 750B euro fiscal stimulus plan that is vital to the region’s economic recovery.

Negotiations have come to a standstill over the issue of grants versus loans. Southern European economies hit hard by the shock of the pandemic and already facing heavy debt burdens have no interest in assuming further loan obligations and are insistent that the funds must come in the form of grants in order for them to be used effectively.

In Northern Europe, the “frugal four” compromised of Netherlands, Austria, Denmark, and Sweden are insisting that the aid come in the form of loans as they are opposed to the direct transfer payments.

Both Germany and France who are the effective economic leaders of the block favor the grant approach. The Germans and the French fully understand that should Europe fail to come up with a credible stimulus approach the very existence of the euro could come in question. The Italians who have suffered the most from the COVID spread and are facing cataclysmic financing issues and very strong populist sentiment at home could very well decide to pull out of the euro if the deal falls through. That would in effect create a catalyst for the rest of the Southern economies to follow and rip apart the idea of a single currency for the region sending EU in chaos. Furthermore, the economic moves could create massive political upheaval with Italy moving closer to China in its diplomatic relations as it further cements its Belt and Road initiative with the Chinese.

Such a dire scenario would not only wreak economic havoc on the continent but will also create massive security issues for the whole Western alliance.

At present, the markets are not pricing in any of such dire scenarios with the consensus view that the “frugal four” will give way on the issue of grants but on some conditionality of how the money will be spent. Still, the possibility of failure is not zero and the complacency of the markets will quickly fade if the Europeans fail to reach some sort of consensus on the fiscal stimulus deal.

Boris Schlossberg
Managing Director

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