European Union agrees on massive post-pandemic stimulus

12:07 PM July 22, 2020

Leaders of the European Union member countries reached an agreement on a massive €750 billion post-Covid recovery fund. Negotiations took over 4 days and were at a threat of a collapse a few times. European stimulus package will be the biggest agreed on by a bloc so far and is aimed at kickstarting post-pandemic recovery.

Agreement reached after 4-day negotiating marathon

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European Summit on the EU post-Covid recovery fund was scheduled for July 17-18, 2020. However, it took much longer to resolve all the issues. Talks extended onto Sunday and Monday, and agreement has been finally reached early on Tuesday. It came as a relief as there was a risk that consensus will not be reached and in such situation rows within the European Union would likely deepen making

The so-called Frugals (Austria, Sweden, Netherlands and Denmark) opted for less money to be paid out as grants and more funds to be provided as loans, which need to be repaid. They have reached their goal with final agreement splitting the total pool into €390 billion in grants and €360 billion in loans. Original proposal put forward by French President Macron and German Chancellor Merkel in May called for €500 billion in grants and €250 billion in loans. 

European post-Covid recovery fund will include €360 billion in loans and combined €390 billion in grants. Source: Bloomberg, European Commission

Climate objectives play a vital role

As the package is aimed at stimulating post-Covid recovery within the European Union it shouldn't come as a surprise that Italy, European pandemic hotspot, will get the most money. Mediterranean country will receive around €82 billion in grants and €127 billion in loans. A point to note is that around a third of funds in the final proposal is tied one way or another to fighting climate change making it the biggest "green stimulus" package in history. €77.5 billion will be distributed via Funds with specified purpose while the remaining part will be provided to EU member countries.

While EU post-Covid recovery fund negotiations were a key theme of the recent summit, European leaders also discussed the next EU budget. A massive €1.074 trillion budget was agreed for the next seven years. Budget will also focus on "green solutions", like supporting sustainable energy and phasing out coal.

European blue chip index - Euro Stoxx 50 (EU50) - reached a fresh post-pandemic high after EU leaders reached agreement on a recovery fund. However, bulls failed to hold onto gains painting a shooting star pattern within the resistance zone at 3,400 pts. Break below the lower limit of the upward channel would be a warning signal. Source: xStation5

European stock markets jumped on the news. Indices from the Western Europe like DE30, EU50 or NED25 moved to fresh post-pandemic highs with the German index even trading positive year-to-date at one point. Stock market gained as European Union showed unity and put concerns over its future existence aside. Looking at other issues, Europe handled the first wave of pandemic quite well and looks to be better prepared than for example the United States for the potential second wave of infections in fall or winter. 

Linking funds to climate change objectives means that European Union will continue to create a friendly environment for "green" projects. This poses a chance for European firms involved in electric vehicle production or development of solar or wind farms. Note that some countries, like for example Germany, are already offering EV subsidies as part of their own stimulus schemes. 

Euro also rallied after EU leaders struck an agreement on a recovery fund. EURUSD jumped above March high at 1.15 and reached the highest level since October 2018. Main currency pair is currently testing a resistance at the 161.8% exterior retracement of the recent correction (1.1580). Source: xStation5


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