The European Union has at last agreed a €750 billion rescue package to provide support to nation state economies following the COVID-19 crisis in the latest euro news with the potential to impact the single currency. After 5 days of lengthy negotiations the EU has agreed €390 billion in grants (€110 billion less than the €500 billion that was originally proposed) and a further €360 billion of cheap loans.
The rescue package was welcomed by investors although there was little impact on the euro to pound exchange rate, closing the day at .9040, marginally lower than where it began. However, there was a rise in euro to US dollar as the currency pair climbed almost 0.7 percent, closing the day at 1.1517. The euro to US dollar exchange rate has now climbed 3 percent in the past month and 6 percent in the past 3 months.
The EU’s rescue package was not agreed easily as the 27 states have been bickering for months about how the package would be funded with the northern states reluctant to consider debt mutualisation. Dutch prime minister mark Rutte was perhaps the biggest threat to the agreement as he consistently rebuked the European Commission’s proposals. And Italian prime minister Giuseppe Conte said that failure to reach a collective agreement would question the very existence of the EU itself.
Conte’s Italy has suffered more than 35,000 deaths and major lockdowns in the north caused the economy to contract by more than 5 percent in the first quarter of this year. The Bank of Italy is predicting a 9.5 percent crash for 2020 although the country has a long way to go.
The Italians had pushed for Coronabonds, which would’ve meant full debt mutualisation but there was fierce resistance from the northern states who feel the southern states do not manage their finances properly. As it is, the European Commission will borrow the funds in the financial markets and repay the debt over the next 38 years through their budgets, which cover 7 years each.
The Italians will be the biggest beneficiary of the package as they’ll receive €82 billion in grants and €127 billion in loans according to estimates. Greece will receive €19 billion in grants and €12.5 billion in loans.
All EU leaders agreed that something had to be done but there was an enormous amount of squabbling over the amounts that each country would receive. EU governments agreed that they were looking at an unprecedented economic contraction and in the end a sweetener was offered to the countries in the north. To get the deal over the line, Germany, Denmark, Austria, Sweden and the Netherlands will receive budget rebates totalling more than €50 billion over the next 7 years. The frugal northern countries had already reduced grants from €500 billion to €390 billion but a further incentive was needed.
For the first time, the EU will be able to borrow on a mass scale, a significant step on the road to debt mutualisation. The borrowing will be included within the EU budget meaning countries like Germany that contribute more to the budget, will be liable to greater repayments of the debt.
The rescue package is significant show of solidarity for the EU which has flirted with one existential crisis after another and this may mark the beginning of moving towards a federal Europe. However, this will not be easy with northern state governments already facing tough questions about bailing out the poorer states in the south.
Is the Euro Now a Safe Haven Currency?
The announcement of the EU rescue package has provided investors with confidence that the EU can unite. With a huge pool of borrowing, investors will diversify away from other currencies such as the US dollar as they purchase these euro denominated bonds. This will in turn strengthen the value of the euro. Investment banks Mizuhu and Credit Agricole are two banks now forecasting higher euro to US dollar rates later this year. This decision has certainly increased confidence around the single currency and its sustainability, even if there are a lot of questions that still need to be answered.
Euro to pound is more open to the volatility of Brexit trade talks. If the UK and EU agree a Free Trade Agreement, then euro to pound will likely fall as confidence returns to the UK but if an agreement is not reached euro to pound could target parity. Whilst the prospect of “no-deal” remains, markets do expect the UK and EU to reach an agreement at some time in the Autumn. Most see the “no-deal” risk at less than 20 percent but with time ticking and the deadlock still not broken, the intentional or accidental default to no-deal is still a possibility.
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